穆迪 (MCO) 2009 Q1 法說會逐字稿

Good day everyone and welcome, ladies and gentlemen, to the Moody's Corporation first quarter 2009 earnings conference call.

At this time I would like to inform you 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 over to Liz Zale, Vice President Investor Relations.

Thank you, Audra.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2009.

I'm Liz Zale, Vice President of Investor Relations.

Moody's released its results for first quarter of 2009 this morning.

The earnings press release and a presentation to accompany this teleconference are both available on our website at IR.Moody's.com.

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

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

Before we begin, I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

In accordance with the Act, I also 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, 2008.

And in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission website.

These, together with the Safe Harbor Statements, 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 members of the media may be on the call this morning in a listen-only mode.

And this call is being recorded.

I will now turn the call over to Ray McDaniel.

Thanks, Liz, and thank you to everyone who is joining today's call.

I'll begin our remarks this morning with a brief summary of Moody's first quarter 2009 results.

Linda will follow with additional revenue detail and operating highlights.

And I will then speak to recent developments in the regulatory area and finish with Moody's outlook for 2009.

After our prepared remarks, we will be happy to respond to your questions.

Moody's results for the first quarter reflected some improvement in credit market activity compared to the fourth quarter 2008 despite the broader economic downturn.

Total revenue was $409 million, down 5% from the first quarter of 2008 and slightly above the fourth quarter of last year.

Excluding the unfavorable impact of foreign currency translation, total revenue was down 1%.

Operating income for the first quarter was $149 million, a decrease of 25% year-over-year, resulting from the decline in revenue and increased expenses that Linda will discuss later in the call.

There was negligible impact to operating income from foreign currency translation.

Diluted earnings per share for the quarter were $0.38 compared to $0.48 for the prior period, and included a charge of $0.03 related to our 2009 restructuring initiative.

Excluding the restructuring charge, diluted EPS for the quarter declined by 15% year-over-year to $0.41.

While we're encouraged by the increased level of activity, particularly in investment grade credit, certain areas of the debt markets remain largely inactive and we continue to expect only limited recovery in 2009.

At this point, I will turn the call over to Linda to provide further commentary on our results and other updates.

Thanks, Ray.

I will begin with revenue at the corporate level.

Total revenue for Moody's Corporation was down 5%.

US revenue declined 10% year-over-year to $209 million, while revenue outside the US remained about flat at $200 million and represented 49% of Moody's total revenue for the quarter.

Recurring revenue of $272 million represented 66% of total revenue in line with the prior year period.

Looking at each of our businesses, Moody's investor service revenue for the quarter was $270 million, a decrease of 9% year-over-year.

Within the US, ratings revenue was down 13% compared to a 5% decrease in non-US ratings revenue.

Revenue from outside the US represented 46% of total ratings revenue.

Looking at global structured finance, revenue for the first quarter was $72 million, down 29% year-over-year.

In the US, revenues decreased by 42% driven by continued declines in asset backed securities and derivatives issuance, and no new issuance in commercial and residential mortgage-backed securities.

Outside the US, structured finance revenue was down 16% driven by a decline in ratings, European credit derivatives that was partially offset by ongoing asset backed securitization activity supported by the central bank facilities.

Next, turning to global corporate finance, revenue in the first quarter increased 15% from a year ago to $84 million.

Revenue grew 18% in the US and 9% outside the US.

The narrowing of investment grade spreads drove an increase in high grade issuance, mainly to refinance upcoming debt maturities.

High yield and bank loan activities remain very limited.

Global financial institutions revenue of $56 million was down 16% from the first quarter of [2000].

US financial institutions revenue decreased 26%, due to issuance decline in the insurance and banking sectors.

Outside the US, revenue was down 7% as issuance more than offset by unfavorable foreign currency impact on revenue.

Last, global revenue for the public project and infrastructure finance business increased by 3% year-over-year to $57 million.

Revenue was about flat in the US where solid activity from utilities in our infrastructure finance sector offset lower issuance in the municipal sector.

Non-US revenue increased 8% due to higher levels of public and infrastructure finance issuance in Europe.

Turning now to Moody's analytics, global revenue of $139 million was up 5% from the first quarter 2008.

In the US, revenue declined 4% to $64 million, as weakness among financial services customers resulted in higher customer attrition, partially offset by new subscription contracts, software licenses and consulting engagements.

Non-US revenue grew 13% and represented 54% of total analytics revenue.

Globally, subscription revenue stayed flat at $117 million.

Software revenue grew 69% year-over-year, largely driven by the addition of the Vermont acquisition and consulting revenue grew 17%.

Moody's first quarter expenses were $260 million, an increase of 12% compared to first quarter 2008.

Excluding the restructuring charge of $12 million which comprised office closures and about a 3% headcount reduction, expenses were 7% higher than the prior year period.

The increase was primarily the result of higher operating and depreciation expenses due to the Vermont and EMB acquisitions, and an increase in the allowance for doubtful accounts.

And incremental rev expense related to the buildout of our Canary Wharf location in London.

Compensation expense was essentially unchanged year over year as benefits from the 2008 restructuring actions were largely offset by costs associated with incremental headcount added through the acquisitions.

Operating margin for the quarter was 36%.

Excluding the restructuring charge, the operating margin was 39%.

Our effective tax rate for the quarter was 35.7%, compared with 38.4% for the prior year period.

The reduction was primarily driven by a larger portion of consolidated taxable income generated in lower tax jurisdictions outside the US as well as net reductions to tax and tax related liabilities.

I would like to turn now to an update on capital allocation and stock buybacks.

At quarter end, we had $1.4 billion of share repurchase authority remaining under our current program.

As mentioned on our fourth quarter conference call, we intend to uphold our commitment to returning capital to shareholders in a manner that is consistent sufficient with maintaining sufficient liquidity in an uncertain environment.

In the near term, that means maintaining our current dividend but curtailing share repurchase activities.

During the first quarter 2009, Moody's did not repurchase shares, and issued 700,000 shares under employee stock-based compensation plans.

Outstanding shares as of March 31, 2009, totaled $235.7 million, a 4% decrease from a year earlier.

At quarter end, Moody's had $1.4 billion of outstanding debt and an additional $300 million of debt capacity available under the revolving credit facilities.

We have used a portion of our cash flow to reduce short-term debt by $57 million from the fourth quarter of 2008.

And currently expect to continue reducing our short-term debt levels throughout 2009.

With that I will turn the call back to Ray.

Thanks, Linda.

I will start with a brief update on the regulatory developments.

We continue to have active communications with regulatory authorities on both the global and regional level.

Within the US, on April 15th, the Securities and Exchange Commission held a public round table discussion on credit rating agencies.

The round table included statements and commentary from market participants as well as academics.

And focused on issues of competition, oversight of rating agencies, alternative business models, the use of ratings and regulation and the SEC's proposed rules on information disclosure and ratings performance history.

The SEC has stated that it will continue to consider these and other topics including proposing additional regulation to help assure that the interest of credit rating agencies are aligned with those of ratings users, possibly in the summer of 2009.

Turning to Europe, on April 23rd, the European Parliament voted to adopt new regulations, which introduces a common regulatory approach for the registration and formal oversight of rating agencies in the EU.

Broadly, the regulation is premised on the code of conduct from the International Organization of Securities Commission or IOSCO, although it does go further in some areas.

It puts in place rules that address conflicts of interest, governance and transparency of credit ratings and credit rating activities.

Examples of some of the requirements include the creation of European based boards of directors, periodic and gradual rotation of analysts, use of alternative rating symbols for structured finance ratings, and various other credit policy and compliance requirements.

Certain parts of the regulation remain open to interpretation and the Committee of European Securities Regulators, or CESR, has been tasked with providing guidance and clarity on those issues.

The regulation is expected to be fully implemented in the first half of 2010.

In addition, the regulation also directs the European Commission to provide a review in three years on the interaction of this regulation with other international developments as well as competition and business model issues.

We're committed to working constructively with CESR and other regulatory authorities for guidance on the implementation of the regulation.

We continue to be fully engaged in dialogue with regulatory authorities as regulatory reviews take place in other international jurisdictions and expect these outcomes to be globally consistent with the IOSCO framework.

Moody's supports the ongoing efforts undertaken by policy makers and regulators to restore confidence in the credit markets in a globally consistent manner.

We will continue to comply with rules and regulations adopted by legislators in jurisdictions in which we operate, and address issues and concerns that various authorities may have in our shared goal of greater market stability and the return of investor confidence.

I will conclude this morning's prepared comments by discussing our full year guidance.

Moody's outlook for 2009 is based on assumptions about many macro economic and capital market factors, corporate and consumer borrowing, securitization, and the nature and impact of government sponsored economic stabilization and stimulus initiatives.

There's an important degree of uncertainty surrounding these assumptions and if actual conditions differ, Moody's results may differ materially from our current outlook.

While we have reaffirmed our guidance for full year 2009 EPS, we have modified other aspects of our full year guidance.

Revenue expectations for certain lines of business have changed based on conditions specific to those sectors and geographies.

Total Moody's revenue for 2009 is now expected to decline in the mid single-digit percent range rather than low single-digit.

This decline assumes foreign currency translation in 2009 at current exchange rates.

Our outlook does not anticipate any significant improvement in revenue until late in the year.

We expect recurring revenue to remain stable and issuance based revenue to reflect generally weak conditions throughout 2009.

We expect a more constant level of expense throughout 2009 versus 2008 with full year 2009 expenses expected to increase in the low to mid single-digit percent range.

A slight change from our earlier guidance from mid single-digit increase with expected operating margin in the mid to high 30s percent for the year.

Our expectation for diluted earnings per share remains within the range of $1.40 to $1.50.

Our outlook for full year 2009 MIS revenue still includes a revenue decline in the high single-digit percent range both in the US and internationally.

Structured finance is now expected to decrease in the low 20s percent range versus a prior forecast of high teens to low 20s with anticipated declines in all asset classes.

Corporate finance ratings revenue is now projected to remain flat to 2008, rather than decline at a mid to high single-digit rate based on our improved outlook for ongoing refinancing activity.

We now anticipate financial institutions revenue to decline in the mid single-digit percent range rather than remaining flat.

Public project and infrastructure finance is still expected to be about equal to full year 2008.

For Moody's analytics, our 2009 growth outlook remains mid single-digit revenue growth, as we expect strength in the software and consulting businesses to offset a low single-digit percent decline in the subscription business.

We now project analytics revenue in the US to decline in the low single digits rather than stay flat, while we still expect revenue outside the US to grow in the low double-digit percent range.

That concludes our prepared remarks.

Joining us for the question and answer session are Michel Madelain, our Chief Operating Officer at Moody's Investor Service, and Mark Almeida, the President of Moody's Analytics.

We'd be pleased to take any questions you may have.

Thank you.

(Operator Instructions).

We'll go first to Peter Appert at Piper Jaffray.

Linda, the change in the cost expectations for the year.

Is that strictly a function of the incremental restructuring you did in the first quarter or is there more to it?

I think, Peter, the restructuring is a large portion of it.

And as Ray noted, it allows our expenses to look flatter quarter to quarter for the rest of the year.

Also, we're keeping a very tight handle on the expenses, and we're watching everything very cautiously.

Ray may want to comment a bit further on that.

Overall, Peter, as we noted in the prepared remarks, the change in our expense outlook is not significant.

And, in fact, it incorporates part of the range that we had earlier in the year.

Linda is correct, it does reflect some of the actions that we've taken on the restructuring.

And that is probably most important in terms of changing how we expect the expenses to look quarter to quarter with this year having a more constant expense run rate than we saw last year.

To the extent that we've had a modest reduction in our revenue outlook for the year, that also has some effect on some of our discretionary spending, and is a reaction to that continued soft environment.

But specifically, Ray, you haven't scaled back hiring or alternatively, haven't -- no expectation for further staff reductions at this point?

Not other than what we incorporated in the restructuring, that's correct.

Okay, thank you.

Then, Linda, on the buyback front.

I guess I was slightly surprised that you chose not to buyback stock because you've been aggressive in the last couple years.

I understand the need to conserve cash, but you're still generating a fair amount of cash.

So how do you balance those things?

Well, Peter, we were pretty active last year, and in fourth quarter we bought back quite a number of shares at an average price of about $25.

We plan that perhaps the stock price might have some recovery going into this quarter.

So we wanted to lighten up.

Additionally, our focus right now is on liquidity and making sure that we have adequate liquidity in a time when liquidity concerns have eased.

But it's still prudent to be cautious.

So absent a tremendous increase in EBITDA, a rather considerable increase in EBITDA, we are going to stick with this strategy for the foreseeable future, as we said.

Should I read that to be therefore probably no share repurchase over the balance of the year?

I think we're leaning that way, Peter, unless we see some sort of dramatic recovery.

I think the fairest way to think about that, Peter, is probably no systematic share repurchase for the rest of the year.

But if we see opportunity, we're certainly going to look at that closely.

Got it.

Then the last thing, I know this is a somewhat sensitive topic, and you've addressed it to the some extent in your comments.

But on the European regulatory front, it felt like the Europeans basically have given you, not a pass, but basically they have not imposed any changes in the business model in terms of the pricing model.

Nor have they imposed any changes in legal liability.

And from that perspective, a fairly positive outcome.

Is that how you would read it?

Certainly on the two points you mentioned, I think that it is a positive outcome, and it is constructive not only for us but for fulfilling our role and function in the market.

But overall, the regulation is going to impose some fairly stringent criteria on our operations.

And it is going to engender additional compliance costs.

We are going to be subject to inspections.

I have every reason to believe that those inspections will be rigorous, and that we are going to have to make sure we have gotten all of the necessary compliance requirements in place by approximately this time next year.

So it is going to have -- it is going to impose additional burdens on us.

Those burdens are directly related to trying to help assure the marketplace that our business is operating conflict free and in a high quality manner.

But we've got quite a bit of work to do to make sure that we're prepared.

Great.

Thanks, Ray.

Thanks, Linda.

We'll go next to Craig Huber at Barclays Capital.

Good morning, a few questions.

First one, can you give us a breakdown, if you would, for transaction versus nontransaction in your four broad categories, just some percentages?

Sure, Craig, it's Linda.

I was anticipating your question.

We'll go first to structured finance.

This is for the first quarter 2009 and I will give you transaction and then relationship, if that's okay.

Transaction is 36%, relationship is 64%.

Corporate finance, transaction 60% and relationship 40%.

Financial institutions, transaction 24% and relationship 76%.

And PPIF, transaction 59%, relationship 41%.

So total for the rating agency is transaction 46% and relationship 54%.

If you go to Moody's analytics, transaction is 10%, relationship is 90%.

So for MCO as a whole, transaction is 34% and relationship is 66%.

Is there any change to how you've broken it out in the past?

No, there's not.

Okay.

And then also, can you comment, if you would on your guidance of $1.40 to $1.50.

You guys historically have a conservative bent to your guidance.

Seems like this is being very conservative here, $1.40 to $1.50.

I guess, sort of walk me through, if you would, how could you get to the lower end of that range to $1.40 to $1.45.

You've got $0.41 here, $0.40 in the fourth quarter.

As dire as things were in the fourth quarter, even the first quarter here, you're at $0.40, $0.41.

Annualizes to $1.60 or so per share.

Where is the caution on top line if things do take a material downturn in the second or third quarter for new issuance?

First of all, we are not anticipating a recovery in some of the significant areas of the credit markets that we participate in.

Certainly, and if it comes, it will be late in the year.

So our revenue outlook does not anticipate that we are going to have significant increase in revenue through most of this year.

And we do have some increase in spending associated with a number of items, such as Linda described in the prepared remarks.

And we're going to move ahead with those spending items, particularly as they relate to things like the fit-out at Canary Wharf and the double rent that we have associated with that.

The compliance requirements that we are going to have to meet both in the US and in Europe.

The increased expense associated with the acquisitions from Vermont and EMB.

We are looking at a -- we do have a cautious outlook object revenue.

I think it's appropriately cautious.

And we've got some investment spending that I would characterize as being clearly strategic or necessary.

And that's putting a damper on our ability to be more bullish on the EPS outlook for the year.

But it also seems though from your comments but also from your press release that the second and third quarter, for example, you are not anticipating revenues down sequentially versus what you saw in the first quarter.

So I'm trying figure out here from your vantage point.

You're saying cost level for the year, I think were your exact words.

I assume that means roughly the $233 million number you had in the first quarter.

We anticipate that our expenses are going to be more level than they were last year.

I don't know that we can hold to what we had in the first quarter.

But the -- again, the combination of a cautious top line outlook, some needed spending.

I think you will hear Linda say that what we have seen on the tax side is not what we are forecasting.

We just don't see at this point the opportunity to raise our EPS outlook.

I hope, as you might imagine that it proves to be conservative and that we do have to come back and do something.

Lastly, if I could, can you quantify, if you would, how much, as you can see it right now, do you think the regulatory cost on an annual basis could add to your cost base?

Craig, we've thought about for 2009.

From what we can see, we have not been able to estimate 2010 yet because we haven't budgeted for 2010, that comes later in the year.

Also, the regulations are at the policy level, not the procedural level.

So as those come out in further detail, we'll know more about this.

For this year, we're looking at an increase in costs in the low to mid single-digit millions of dollars number.

So not that much.

We do have that built into our expense forecast, and into our guidance.

Great.

Thank you.

So not that heavy for this year.

Next year, we'll get back to you.

But you're not anticipating it could be like $20 or $25 million on top of what you're putting into it this year, are you?

Not from what we know at this point.

We await, as Ray said, further instructions from the SEC.

I don't think it would be that kind of a number, Craig.

And in part, because the -- as we've discussed before, the ramp-up that we've been doing in compliance over the last few years, and the incremental expense that we've now put into our outlook for the remainder of this year is going to smooth that increase that we will see in 2010.

Great, thank you both.

Sure.

Next we'll move to Michael Meltz with JPMorgan.

Ray, I like the conservatism.

Keep it up.

The 5% revenue decline in the quarter, I think you said FOREX was 400 basis points of drag.

Implicit in your guidance; the 5% of drag.

What's the FOREX assumption?

Michael, it's Linda.

Let me go through what we have as effects of FX for this quarter, and we're looking at FX remaining level for the year.

So let me just take you through quarter.

For the revenue impact for the company as a whole, FX represented a drag on revenue of $19.4 million or 4.5%.

On the operating income line, because we do get some of that back on expenses, the results were negligible.

Were off about a million dollars on the operating income line or less than 1%.

Right.

My question is on the year, if your guidance is down 5%, roughly, do you expect the FOREX drag to be in that range for the year.

Or when you're saying you're assuming current rates, what are you actually thinking in terms of basis points to revenues?

We don't give guidance on FX.

The problem is Michael, the dollar and pound particularly are moving around quite a bit.

So I'm not quite sure we'd be --

Let me ask it this way, Linda.

I would think that the FOREX drag is a little bit bigger than you thought it would be three months ago so as part of your revenue tweak related to that --

I think that's fair, Michael.

And we're not going to put an exact pin that.

But directionally it's good thinking.

I agree with that.

It was more of a drag than we anticipated in the first quarter.

And at this point it looks like it would be more of a drag going forward.

The tax rate which was low in the quarter.

What's the expectation for the full year, please?

We're guiding 38 to 39.

In certain quarters we do a little bit better than we do in other quarters.

Some of that is difficult to predict.

So we'd like everybody to stick at 38 to 39 for the year.

Of course, we hope we're able to do better, but we don't want to count on that.

The expense breakdown, can you just remind us what was the comp as a percent of total excluding the charge, I guess.

And then what was the incentive accrued at?

Sure.

Hang on just a second here.

Incentive comp for the first quarter was 6% of total compensation.

And comp as a percentage of total expenses was 66%.

You had another question?

I'm sorry.

No, that's it.

I'm sorry, you said in your prepared remarks something about higher allowances.

What is that?

Is that at Analytics?

Sure.

Let me trace through the expense increase just to make sure everybody is clear on this.

Expenses for first quarter of 2009 were $260 million, and if you take off the $12 million restructuring charge it's $248 million.

For first quarter last year we had $232 million.

So the difference is $16 million.

The big drivers there would be increased rent, a lot of which is the double rent for Canary Wharf, as Ray had mentioned, was about $4 million.

Allowance for doubtful accounts increasing is about $2 million, Michael.

And that's not solely related to Analytics.

It's really across the whole company.

That's still less than 1% of expenses, but again it's something in this economic environment we have to think about.

Other represented about $4 million of additional expense.

So, all of that accounts for $10 million out of the $16 million in the expense increase from last year.

The rest, a good chunk of that, is the increased expenses for the Vermont acquisition and the EMB acquisition.

So those are the basic drivers.

I would also note that last year.

Our first quarter expenses were a little bit lighter than usual.

We had that insurance recovery for France and a few other things.

So a little bit of a tougher comparable, but those are the big drivers.

But my question about allowances for doubtful.

What's an example of folks not paying you there?

I'm just -- sorry for the minutia of the question, but why would that tick up?

Insolvency of a firm.

Okay.

Thank you.

We'll go next to John Neff at William Blair.

Hi, thank you.

Specifically, in the EU the mandatory rotation of analysts every three years.

Can you talk about sort of the cost, the challenges, and maybe the logistics of trying to implement that?

I realize it's still early.

Is there any view on how or if that would be implemented on a global basis?

Yes, this is John.

An example of one of the things that requires further interpretation and understanding from CESR, and one of the things that CESR has been tasked with providing guidance around.

Certainly to the extent that we have periodic analyst rotations that are required that will add incrementally to our costs over the next few years.

The extent to which those analyst rotations must occur and whether they're, for example, whether there's flexibility on the frequency, whether it applies in all jurisdictions or some jurisdictions.

By the size of our office in certain jurisdictions and whether it would have an extraterritorial effect outside the EU, all of those are questions yet to be answered.

So it -- directionally, again, it's easy for us to identify that as a source of incremental expense over the next three, four, five years.

How much and how we might seek to manage that in a way that properly complies and still minimizes the incremental expense impact yet to be determined.

Based on your guidance, I'm assuming that you are not expecting much of a revival in the structured market.

And so I specifically wanted to just get your expectations or impressions of the TALF program and whether or not you're seeing any impact, favorable, directly or indirectly, to spreads.

And if not, what it will take for the TALF to be successful?

I think the TALF -- the first two rounds of the TALF have been successful to the extent that there have been transactions that have been completed under the TALF.

They have covered several different asset categories.

So there has been access for the approved asset category, and there will be additional approvals going forward.

I would expect that the TALF is going to be a useful contributor to structured finance activity, but not a bonanza for the structured finance market going forward.

It will certainly be helped by the expansion of assets.

But to the extent that there is a somewhat limited base of investors and that it may not be as cost effective as issuers and arrangers would like it to be, I don't think it's going to be a cure-all for the structured market.

I think it will continue to build momentum.

I think it will continue to be more successful throughout the year.

But that is not going to be especially significant to our outlook or to the likelihood of changing our outlook, I don't think.

Our first quarter fees for TALF were just under $1 million.

So despite what you might read in some of the media reports, this is not a windfall for Moody's or in my opinion, for the rest of the credit ratings industry.

This is rather small.

One of your -- your primary competitors has indicated that the fees they have received under TALF has equated to less than a basis point.

Has there been any change in your pricing for transactions associated with the TALF?

No, but to the extent that the transactions are large and are subject to fee caps that would reduce the yield per dollar of issuance.

Linda, I was just wondering, last quarter you pleasantly surprised us with lowering your CapEx outlook for the year.

Just wanted to see if it was still $90 million to $120 million.

I think that would still work pretty well, John.

Our big expense as you know, is the Canary Wharf buildout for this year, which is in the low $40 million.

And once we get through that, we'll see how we go for next year.

But I think that looks relatively good.

And then question related to CapEx was the last two years it's been $266 million in CapEx.

Obviously a significant uptick from what it had been historically.

From the standpoint of your systems and your readiness to comply with all of the new regulations -- is there going to be much of an incremental cost in terms of CapEx or sort of systems requirements?

It's an interesting question, John.

You could really sort of consider it either way.

We need to make some systems improvements and you are seeing some of those come through.

The CapEx line absolutely as we build things out.

Those are the right things to do, and they're also very helpful from a regulatory perspective.

In other words, we're able to trace through deals all the way from the rating to the billing, and that's a very helpful thing for us to be able to do.

Both for ourselves and for our own accounting as well as for regulatory inquiries and questions.

So, we have started ramping up, as Ray had mentioned.

And that's part of the reason why our CapEx has moved up a bit, but that would be a component of it.

You are correct.

Thank you.

(Operator Instructions.) We'll go next to Edward Atorino at Benchmark.

On some of the interest expense, other stuff, pretty low for the quarter.

I know that bounces around a lot, but any help on guessing what that might be over the balance of the year?

Let me see what I can tell that you might be able to help you.

With interest, 3.3.

There's some offset in there, I guess, because it's down from 11.

You've got that right.

Our expense on borrowings is coming off a bit as we reduce our debt.

And so I think it's fair to say if you want to look at interest expense first, and then kind of the offset that might be a good way to do it.

Our expense on borrowings is about $12 million for the first quarter.

But we did have an offset because of that tax adjustment, which took the total interest expense to about $3 million.

Got you.

Then offsetting that, or an additional drag on that actually, was the FX situation.

And all of this nets to about $7 million of expense.

Now, you are right, predicting that line quarter to quarter is pretty hard.

I think our interest expense is relatively more constant, and FX will bounce around depending on what happens.

So $12 million is interest excluding any adjustments.

That would be right.

Okay, thanks.

And that does conclude the question-and-answer session.

At this time, we'll turn the conference back over to Mr.

McDaniel for any closing remarks.

Thank you very much.

Before we end the call, I do want to announce that Moody's will host its fourth annual investor day on Thursday, June 4th in New York.

Attendance is by invitation only but the event will be accessible by webcast, and further details will be provided shortly on our Investor Relations website.

So again, thanks a lot for joining.

We look forward to seeing many of you in June.

Thank you.

This concludes Moody's first quarter earnings call.

As a reminder, a replay of the call will be available after 4:00 p.m.

Eastern time on Moody's website.

Thank you.