穆迪 (MCO) 2012 Q4 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year-end 2012 earnings 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 question and answers following the presentation.

I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for 2012 and our outlook for 2013.

I am Salli Schwartz, Global Head of Investor Relations.

This morning, Moody's released its results for the fourth quarter and full year of 2012 as well as guidance for full year 2013.

The earnings press release and the presentation to accompany this teleconference are both available on our website IR.moodys.com.

Ray McDaniel, President 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 toward 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 31, 2011, and in other SEC filings made by the Company which are available on our website and on the Securities and Exchange Commission's website.

These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

I will now turn the call over to Ray McDaniel.

Thank you, Sally.

Good morning and thank you, everyone, for joining today's call.

I will begin by summarizing Moody's fourth-quarter and full-year 2012 results.

Linda will follow with additional financial detail and operating highlights.

I will then speak to recent regulatory and legal developments and finish with comments on our outlook for 2013.

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

Fourth-quarter revenue of $754 million increased 33% over the fourth quarter of 2011.

We benefited from double-digit revenue growth in most lines of business, driven by robust corporate finance ratings activity at Moody's Investors Service and continued strong growth across Moody's Analytics.

Operating expenses for the fourth quarter were $494 million, a 25% increase from the fourth quarter of 2011 and included a non-tax-deductible goodwill impairment charge of $12 million for an EPS impact of about $0.06 related to our training and certification business.

Operating income for the fourth quarter was $260 million, a 51% increase from the prior-year period.

Adjusted operating income for the fourth quarter was $296 million, up 54% from the same period last year.

Diluted earnings per share of $0.70 for the fourth quarter increased 63% from the prior-year period.

For full year 2012, Moody's revenue of $2.7 billion increased 20% from full-year 2011.

Revenue at Moody's Investors Service was $1.9 billion and increased 20% from last year.

Moody's Analytics revenue of $844 million was 19% higher than the prior-year period.

Approximately half of Moody's Analytics' 2012 revenue growth was organic.

Operating expenses for the full year 2012 were $1.7 billion, up 19% from 2011.

Operating income of $1.1 billion increased 21% from $888 million in 2011.

Full-year 2012 adjusted operating income of $1.2 billion increased 22% from the prior-year period.

Diluted earnings per share of $3.05 for 2012, which included a $0.06 legacy tax benefit in third quarter, increased 22% from the prior-year period.

Excluding legacy tax benefits in both years, diluted earnings per share of $2.99 for the full year 2012 also grew 22% year-over-year.

I will now turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray.

I will begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the quarter increased 33% to $754 million.

Foreign currency translation for the quarter was negligible.

US fourth-quarter revenue increased 40% to $401 million while revenue outside the US grew 26% to $353 million and represented 47% of Moody's total revenue, down slightly from 50% in the year-ago period.

Recurring revenue grew 10% to $351 million and represented 46% of the total revenue, down from 56% in the prior-year period.

This was primarily the result of faster-growing transaction revenue driven by robust investment-grade and speculative-grade issuance.

Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $519 million, up 42% from the prior-year period.

Foreign currency translation for the quarter unfavorably impacted MIS revenue by 1%.

US revenue for MIS increased 49% to $307 million over the prior-year period.

Revenue outside the US of $213 million increased 32% and represented 41% of total ratings revenue.

Within MIS, global corporate finance revenue in the fourth quarter increased 73% from the year-ago period to $245 million, primarily driven by record issuance in both investment-grade and speculative-grade markets globally as corporations continue to take advantage of historically low interest rates.

Revenue was up 72% year over year in the US and up 76% outside of the US.

Global Structured Finance revenue for the fourth quarter was $103 million, 18% above the prior-year period.

In the US, revenue increased 50% year over year due to strong issuance of commercial mortgage-backed securities and collateralized loan obligations.

International Structured Finance revenue was down 9% against the prior-year period, primarily reflecting weaker issuance in residential mortgage-backed securities in Europe.

Global Financial Institutions revenue of $86 million increased 29% from the same quarter of 2011, primarily reflecting increased banking issuance activity from issuers taking advantage of improving market conditions.

US revenue was up 39% and non-US revenue was up 23% as compared to the fourth quarter of 2011.

Global revenue for the public project and infrastructure finance business rose 19% year over year to $85 million.

Revenue was up 9% in the US, primarily due to gains in project finance, while non-US revenue increased 36%, reflecting growth in European infrastructure finance as issuers increasingly sought financing from the bond markets as compared to DAX.

Turning now to Moody's Analytics, global revenue for Moody's Analytics of $235 million is up 17% from the fourth quarter of 2011.

Approximately two thirds of MAS growth in the fourth quarter was organic.

Excluding the impact of foreign currency translation, revenue grew 18%.

US revenue grew by 16% year over year to $94 million.

Non-US revenue increased 18% to $141 million and represented 60% of the total Moody's Analytics revenue.

Globally, revenue from research, data and analytics of $126 million increased 9% from the prior-year period and represented 54% of total MA revenue.

We continue to see good demand for credit research by our credit review offering as well as strong customer retention rates in the mid-90%'s range.

US revenue was up 11% and non-US revenue was up 7% as compared to the fourth quarter of 2011.

Revenue from enterprise risk solutions of $79 million grew 31% from last year, reflecting strong growth of products and services that support bank, regulatory and compliance activities as well as the December 2011 acquisition of Barrie & Hibbert.

Revenue was up 19% in the US, and non-US revenue was up 36% against the prior-year period.

Organic subscription revenue, which includes MA's research, data and analytics segment plus certain products within MA's enterprise risk solutions segment, was up 10% for the fourth quarter of 2012.

Professional services revenue grew 21% to $30 million, reflecting the acquisition of a majority stake in Copal Partners in November 2011.

US revenue nearly tripled while non-US revenue increased 11% year over year.

Turning now to expenses, Moody's fourth-quarter expenses were $494 million, an increase of 25% compared to fourth quarter 2011.

Incremental compensation expense, which accounted for slightly less than half of the year-over-year expense growth, was primarily driven by higher accruals for incentive compensation and Moody's profit sharing.

This reflected the stronger full-year results as well as increased headcount from our growth in our existing businesses and from acquisitions in late 2011.

Fourth-quarter expense growth also reflected an accrual to cover future estimated legal defense costs for our upcoming Abu Dhabi and [Ryan bridge] trials.

Expenses also included the previously mentioned non-tax-deductible goodwill impairment charge of $12 million.

Excluding growth from incentive compensation and profit sharing as well as legal and impairment costs, expenses for the fourth quarter were 10% higher than the prior-year period.

The impact of foreign currency translation on operating expenses for the quarter was negligible.

Despite increased costs, Moody's reported operating margin expanded 420 basis points year-over-year from 30.3% in the fourth quarter of 2011 to 34.5% for the current quarter.

Adjusted operating margin was 39.3% for the quarter, up from 34% from the same period last year.

Moody's effective tax rate for the quarter was 31.5% compared with 37% for the prior-year period.

The decrease in the effective tax rate was primarily due to the favorable impact of tax planning initiatives related to foreign income in 2012.

Now I will provide an update on capital allocation.

Moody's increased its quarterly dividend on December 11, 2012 by 25% to $0.20 per share of common stock.

During the fourth quarter of 2012, Moody's repurchased 1.5 million shares at a total cost of $71 million and issued 1.9 million shares under employee stock-based compensation plans.

For the full year 2012, Moody's repurchased 4.8 million shares at a total cost of $197 million for an average price of $40.58 per share and issued 6 million shares under employee stock-based compensation plans.

Shares outstanding as of December 31, 2012 totaled 223 million, essentially flat from a year earlier.

As of year end, Moody's had 677 million [shares] -- $677 million -- excuse me -- of share repurchase authority remaining under its current program.

Moody's is currently in the market repurchasing shares under our systematic repurchase program.

As of December 31, 2012, Moody's had $1.7 billion of outstanding debt and $1 billion of outstanding debt capacity available under our revolving credit facility.

Cash and cash equivalents were $1.8 billion as of December 31, 2012, an increase of $995 million from a year earlier, due in part to Moody's August 12 bond offering of $550 million (sic-see press release "$500m") of unsecured notes.

As of December 31, 2012 approximately 50% of our cash holdings were maintained outside the US.

Free cash flow for 2012 was $778 million, an increase of $43 million from a year ago.

We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity.

And with that I'll turn the call back over to Ray.

Thanks, Linda.

I will continue with an update on regulatory and legal developments.

In the US, in December 2012, the SEC published and delivered its report under Dodd-Frank on matters relating to assigning credit ratings for Structured Finance products, which is commonly referred to as the Franken Amendment study.

After an analysis of the benefits and concerns of the various business models, SEC staff identify potential courses of action but noted that any changes to Commission rule making would require additional study of relevant information.

In this respect, Commission staff recommended that a roundtable be convened at which proponents and critics would be invited to discuss the study and its findings.

The timing of this roundtable has not yet been announced.

The remainder of the SEC's rule making under Dodd-Frank is expected later this year.

Turning to Europe, as discussed on previous calls, the European Commission proposed in 2011 to expand regulatory oversight of credit rating agencies operating in the EU, and to address issues such as reliance on ratings and regulation, accountability, competition, transparency and managing conflicts of interest.

After a year of dialogue among political institutions, regulatory authorities and market participants, last month the European Parliament voted on and adopted a third round of legislation related to credit rating agencies known as CRA3.

A few additional steps remain in the legislative process before CRA3 is finalized.

We expect that CRA3 will come into effect sometime in the second half of 2013.

Moody's is presently taking the necessary steps to prepare for the implementation of the new regulations.

As always, we will continue to advocate for globally consistent approaches that are aligned with the G-20 statements and directives.

Finally, we have received a number of questions from shareholders and analysts about the US Department of Justice's civil complaint filed this week against McGraw-Hill and S&P.

As we have been disclosing in our 10-Q and 10-K filings, Moody's, like other financial services firms, has been subject to heightened scrutiny, increased regulation, ongoing investigation and civil litigation.

As such, Moody's routinely receives inquiries and responds to requests for information as well as hosts inspections and reviews by authorities in jurisdictions worldwide.

While we believe specific matters are material, we communicate those matters in our filings and other disclosures to the market.

Moody's has not been named as a party in the Department of Justice's complaint against McGraw-Hill and S&P, and we have no basis to comment on that matter.

I will conclude this morning's prepared remarks by discussing our full-year guidance for 2013.

Moody's' outlook for 2013 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer borrowing and securitization and the amount of debt issued.

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

Our guidance assumes foreign currency translation at the end-of-quarter exchange rates.

Despite ongoing economic uncertainty, we anticipate generally favorable market conditions will remain in place in 2013.

As a result, we expect growth across all areas of our business this year.

For Moody's overall, the Company expects full-year 2013 revenue to grow in the high-single-digit percent range.

Full-year 2013 operating expenses are projected to increase in the low-single-digit percent range.

Full-year 2013 operating margin is projected to be between 42% to 43% and adjusted operating margin for the year is expected to be between 46% and 47%.

The effective tax rate is expected to be approximately 32%.

The Company expects diluted earnings per share for the full year 2013 in the range of $3.45 to $3.55.

We expect full-year 2013 share repurchases of approximately $500 million subject to available cash, market conditions and other ongoing capital allocation decisions.

These repurchases are meant to substantially offset the impact of employee stock-based compensation plans.

As you are aware, we strive to strike a balance between share repurchases and dividends, which have increased in line with earnings.

Capital expenditures are projected to be approximately $50 million.

We expect approximately $100 million in depreciation and amortization expense.

Incremental compliance and regulatory expense is projected to be in the $10 million to $15 million range.

For the global MIS business, revenue for full-year 2013 is expected to increase in the high-single-digit percent range.

Within the US, MIS revenue is expected to increase in the high-single-digit percent range while non-US revenue is expected to increase in the mid-single-digit percent range.

Corporate Finance revenue is projected to grow in the high-single-digit percent range.

Revenue from Structured Finance is expected to grow in the mid-single-digit percent range while revenue from financial institutions is expected to growth in the low-single-digit range.

Public project and infrastructure finance revenue is expected to increase in the low-double-digit percent range.

For Moody's Analytics, full-year 2013 revenue is expected to increase in the high-single-digit percent range.

Within the US, MA revenue is expected to increase in the high-single-digit percent range.

Non-US revenue is expected to increase in the low-double-digit percent range.

Revenue from research, data and analytics is projected to grow in the high-single-digit percent range, while revenue for enterprise risk solutions and professional services are each projected to grow in the low-double-digit percent range.

This concludes our prepared remarks.

Joining us for the question and answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investors Service; and Mark Almeida, the President of Moody's Analytics.

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

(Operator instructions) William Bird, Lazard.

Ray, given what your stock is doing, are you likely to front-load stock buybacks this year?

I think we are going to have to look at how the stock performs over a bit longer period of time.

Our thinking had been to be fairly balanced in our share repurchase throughout the year, and we haven't made any different decision at this point.

Also, I guess at a higher level, you touched on recent legal developments.

I was wondering if you could just give your perspective just on how one gets comfortable with recent legal developments.

Well, I think the matter that I mentioned in our prepared remarks as far as the Department of Justice's complaint is -- really, all I can say is that we are not a party to that, and so we are not really able to comment because we don't have any information other than what is publicly available.

I would add that we don't have any knowledge of any pending complaint by the Department of Justice raising similar claims against Moody's.

Thank you.

Bill Warmington, Raymond James.

Good morning, everyone.

First question for you is -- there was some news this morning that European Central Bank said banks will be repaying EUR5 billion of its emergency three-year loan over the next week.

I just wanted to ask about -- sorry, that's EUR5 billion -- about $6.7 billion in the US.

How about that as a driver of the financial institution issuance in Europe in 2013?

Sure.

I guess it's probably worth reminding everyone that, in the Financial Institutions area in particular, our business is more heavily weighted towards recurring revenue and annual pricing agreements.

So we are not as susceptible either on the positive or negative side to changes in issuance volumes.

That being said, any indications of repaying loans would be an indication of potential market stability and some improved economic activity and we would have to look at that as a positive.

At the same time, we do expect that deleveraging in the banking sector, particularly in Europe, is going to continue, and that's a positive.

Okay, and then on the share repurchases, I just wanted to ask if the intent there is to offset dilution or to create a net reduction.

And in that sense, I wanted to ask your thoughts on what the fully-diluted shares exiting 2013 are that are built into the $3.45 to $3.55 guidance.

Sure, Bill, it's Linda.

Our intent with doing $500 million in share repurchase in 2013 would be to first cover dilution from employee issuance plans; and then, secondly, to hopefully have some reduction in the overall share count.

Now, that depends on a lot of things.

It's a little tricky to model because, as you may have noticed, our share price has been a bit volatile of late.

So at this point we are modeling a slight reduction, but we are going to have to see how it goes -- very tricky to model at this point.

Got you.

And that $12 million amortization charge that you mentioned -- I just wanted to confirm -- that works out to be about $0.05 after tax?

I think we are thinking it's -- yes, it's about $0.06 after tax, subject to rounding, Bill.

But, yes, $12 million not to be tax affected.

Okay.

Then one last question -- are you seeing any evidence of a shift in corporate debt issuance motives?

It seems, up until now, the issuance has been very oriented towards refinancing.

Are you starting to see any issuance for other purposes -- M&A, plant expansion, something like that?

Sure.

Let me talk a little bit about issuance, and I would like to first talk about investment grade and then I would like to talk about high yield.

We have polled a couple of the banks going into this earnings call, and I think the general comment would be issuance so far in 2013 has been stronger than expected.

January for US high-grade, we saw $112 billion of issuance.

That was the fifth-largest month on record.

And the expected volumes for February, polling three different banks -- and again, we talked to Bank of America Merrill Lynch, Citi and Morgan Stanley -- they're looking at an average of $67 billion for the US for February.

If you look at the last seven years' average, that was about $61 billion, so that skews a little bit toward the higher end.

For the first quarter, we are looking at an average of $262 billion of US high-grade issuance.

Again, compared to what we might see over the seven-year average, that was $234 billion.

So, again, first quarter in high-grade is looking pretty healthy.

What we are seeing so far in terms of use of proceeds is mixed.

We are seeing some pre-funding, some share repo, some pension funding, some M&A, some refinancing.

So a bit of a mix across the use of proceeds scale.

Overall, the banks are generally viewing that issuance will be down a bit 2013 over 2012.

We are seeing a range sort of ranging from flattish to down 10%-ish.

We are modeling revenues down for high grades in the high-ish single digits.

We would like to comment that, every week, we have seen positive funds flows for high-grade this year, a total of $7.8 billion.

So incoming fund flows into bond funds are good.

Now, turning to high-yield, activity in January has been robust and the quote is, it is as good as it has ever been.

$41 billion of high-yield issuance in January and volumes for February about $23 billion of high-yield issuance.

Again, we are seeing a call of about 10% reduction in high-yield issuance in 2013 versus 2012.

And on use of proceeds, basically the same things we have seen before -- refinancing, repricing, M&A, dividends -- not a lot of event-driven deals yet, but we may see some move in that.

And again, for high-yield, we are modeling revenues down 2013 over 2012 and sort of a high-single-digit range.

Though, we would, note, again, fund flows into high-yield bond funds have been positive as well.

So market trends are quite good.

Use of proceeds, mixing it up a bit, and overall, the market looks pretty good for the first quarter.

So I hope that answers everything you had, Bill.

And more, boy, thank you very much.

Peter Appert, Piper Jaffray.

Ray, can you talk at all about the situation with the various state attorneys general?

I think you guys are named in a few of these suits.

Yes, there are a couple that we have been named in.

They have been around for a while.

And as I at least touched on in the prepared remarks, we get inquiries from regulators and various other authorities, including the state attorneys general.

We obviously cooperate with those inquiries and we will continue to do so.

So it's something that is ongoing, and we have been as responsive as we can be in trying to cooperate with the state AG's when they make information requests or have inquiries.

My understanding is that they are approaching this a little bit differently than the fraud charges that you have seen from other players.

Does that change the legal complexion at all from your perspective, in terms of the potential risk?

Well, as you know, there's a very high standard for fraud that is a higher standard than exists for some other potential claims that could be raised.

But, again, to the extent that these are information requests and inquiries, it's a matter of us making sure we get the proper information back to the authorities at the proper time.

Got it.

Sorry to dwell on this, Ray, but one last thing on this -- so the situation with New York State -- you have got some sort of a settlement from a few years ago.

What kind of protection does that give you from further action by them?

The settlement agreement itself is confidential.

The New York Attorney General did issue a press release summarizing some of the terms back in 2008, and you might want to go back and look at that.

We take that agreement very seriously and certainly believe that we are complying with that.

And so, as for that matter, we think we have done everything that we have been asked to do in reaching the agreement with the AG.

Okay.

And, Ray or Linda, the accrual for legal costs -- I'm not sure if you have done this before.

Have you; and, can you quantify what the number is?

Sure, Peter.

It relates to our insurance accounting.

And let's be very clear about what is going on here.

Because of that insurance accounting, we were able to take a look at our most fulsome estimate of what is going on with the upcoming trial expenses, which will take place in 2013, and take that expense in 2012.

So we have taken the provision in 2012 for the 2013 expenses.

The amount that we think that comprises in the quarter-over-quarter view would be $21.5 million.

Great, thank you.

And then, Linda, the Structured Finance business in the current quarter was quite robust.

Where is the strength coming from, and how do you think about the sustainability of that, specifically?

Sure, Peter, I appreciate the questions about the business.

The Structured Finance business had a very strong fourth quarter.

We are seeing the strength, as we mentioned in the script, coming from CMBS issuance and also from CLO issuance, which has been very heavy.

And we would expect both of those to continue.

If we look at the breakdown in the Structured Finance business for the fourth quarter, a total of $102.9 million, which is the best number we have seen in quite some time.

27% came from ABS, 19% came from RMBS, 28% of that came from commercial real estate and 25% from derivatives.

Just to add that the strength is really coming out of the US market as opposed to the European market, so we will be keeping an eye on the European side, in particular, to see whether there is going to be a pickup there in 2013.

Got it.

And, Ray, I'm sorry, one last thing on the regulatory front -- the SEC rule making -- any thoughts in terms of what might come out of that?

We think that most of the thinking around this has been completed, and we had been engaged really over the last year or so in implementing compliance and transparency process changes that we think are going to be aligned with the final rules.

So our expectation is that the communications that have come out of the SEC to date are going to be very consistent with the final rule making.

Got it.

Thank you.

(Operator instructions) Craig Huber, Huber Research Partners.

I have some more questions on fundamentals here as well.

Linda, would you be so kind to break pit some more segment detail here on high-yield bank loans, investment grade, etc., for each of the four segments, just the percentage of revenues for each --

Sure.

-- for the quarter?

Craig, with the note that I already did structured, so we will consider that one already in the transcript, let's go to corporate.

So total corporate issuance, total corporate revenue, excuse me, for the fourth quarter of 2012 was $244.9 million; and investment grade comprised 23% of that, high-yield comprised 24% of it, bank loans 20% and other accounts, which is MTN's and other things, 34% of it.

So what we are seeing is that high-yield is running quite strong and investment grade is running strong as well.

We went through structured's for a previous inquiry, so we will go through FIG.

Total issuance of $86.2 million in the quarter, banking 73% of the revenue, insurance 22% of the revenue and managed investments 5% of the revenue.

And again, that's relatively similar to what we have seen.

FIG does not move around all that much.

And then lastly, public project and infrastructure was $85.4 million for the fourth quarter in revenue.

PFG and sovereign comprised 47% of that revenue, munis 6% and project and infrastructure 47%.

And compared to a year ago, a little bit heavier on the projects and infrastructure and a little bit lighter on the PFG and sovereign.

But also, that area is running pretty strongly for us right now.

Do you want me to do Moody's Analytics as well, Craig?

Sure.

Okay, $234.8 million for the third quarter, 54% from research, data and analytics; 34% from enterprise risk solutions; and 13% from professional services; and from year-ago, running a little bit heavier on enterprise risk solutions.

Last year was 29% of Moody's Analytics total, and this year 34%.

I think that covers it all.

And then also on the cost front in the quarter, can you tell us, please, what the incentive compensation accrual was in the fourth quarter here?

Sure.

Incentive compensation for the fourth quarter was $60.1 million, which is up from $31.9 million in the same quarter last year.

Obviously, we had an historically strong performance in the fourth quarter, so incentive compensation moved up.

Profit sharing, which we cover in a different line, Craig, was also higher as well for the fourth quarter.

Now much was that one up?

That was $2.6 million last year and $4.3 million for this year.

And then just for the benefit of all, can you maybe give us the incentive comp for each of the first three quarters?

I have it, but I think it would be helpful for people to see how it is progressing for the year.

Sure.

For 2012, it's laid out, and this is both bonus and profit sharing.

It was $30.8 million in the first quarter, $28.2 million in the second quarter, $70.7 million in the third quarter and $64.4 million in the fourth quarter, for a total of $194 million for the year.

Now, for next year, we are going to normalize back to 100% of bonus targets.

So you should see this number come off, Craig.

What we think we would like you to do is model about $30 million a quarter for total incentive compensation, if it runs flat across the year.

So $30 million-ish, maybe a little higher, incentive compensation for each of the quarters in 2013 should be $120 million, $125 million, if we hit our targets at 100%.

Of course, if we do better, incentive compensation and profit sharing will be higher.

Does that do it?

No, I've got a couple more little minor ones, if I could.

On the pricing front, what is your expectation for pricing for surveillance fees, for new fees, and also for transaction this year?

Sure.

We don't go into the line by line.

I think we would say mid-single-digit price increases across the board.

That comprises a variety of complexity, higher in some areas, lower in some areas.

It really depends on the region, the product, the geography.

And I would just add, Craig, that -- again, remember, it still does relate to volume of issuance.

So if we have heavier issuance volume, the pricing that relates to transaction-based revenue obviously goes up.

And if issuance is lighter, we are going to see less benefit from pricing.

And so the pricing increase this upcoming year is what's driving maybe half of this 8% to 9% increase you are talking about for research, data and analytics for 2013?

It's roughly half that pricing?

I don't think it's going to be that much now.

So, the rest volume, then, you are saying?

And mix.

And, Craig, as we said in the script, very high retention business rates in that business, a mid-90s retention, which is great.

Very good, thank you.

Doug Arthur, Evercore.

Ray, just looking at -- and you have had a few questions on this already, on issuance trends.

The comps do get quite tough as you go up against 2012 numbers as the year evolves, particularly in high-grade and high-yield in the US.

But it looks like your international, and particularly Europe, is picking up in a number of your sectors -- public, you know, project finance, infrastructure; we talked about banking.

And also, it looks like the structured market is slowly coming into form (technical difficulty).

So I guess I'm just curious as to your thoughts on new areas of growth that you are starting to see and what that might mean for 2013.

Sure.

And let me ask Michel Madelain if he would like to comment on this, particularly on the European side, since you raised that.

I think in Europe, really, if you look by different asset classes, I think in Structured Finance, as we say, the volumes this year have been disappointing against what we have seen in the US.

The mix between US and non-US business has shifted, actually.

I think the US is about 60% in terms of revenues versus international.

And it was a decent number last year.

We don't expect next year necessarily a rapid uptake of the volume in Structured Finance in Europe, for a variety of reasons.

In terms of CFG, I think the main driver continue to be -- is intermediation.

That's more than refinancing.

I think that's different against with what we are seeing here.

And in terms of infrastructure, I think there we have similar trends than the one we are seeing on the corporate side, basically, again, disintermediation and demand for credit, basically, which help us (inaudible).

And financial institutions -- the story there is really a question of return to confidence.

And I think, again, with confidence coming -- return to market access, especially from the less frequent issuers, which are impacting our revenue line.

Okay, great, thank you.

Doug, it's Linda; I just wanted to comment.

We have got every quarter up quarter-over-quarter for the rating agency this year.

But we would take your point that the fourth quarter of 2012 was pretty strong.

And so the fourth quarter may be a little bit softer than the fourth quarter of 2012, but every other quarter we have got up for rating agency revenue, if that helps you.

Yes, that's great, thank you.

Edward Atorino, Benchmark.

Mine was sort of answered, but with the financing and stuff, will interest expense be much different than 2013 from 2012?

Sure.

Interest expense, R&D, looking at non-operating expenses, it's pretty simple.

The main thing will be we did our bond deal for $500 million back in August.

We are carrying slightly higher expenses on borrowings for that.

We were running about $16 million a quarter last year, Ed, for that; and this year we are going to be running about $21 million, $22 million.

And that is the main difference and that line, nothing much more exciting than that.

In the 80's for the year?

Yes.

$80 million?

Yes.

One final question -- I don't want to belabor this.

There was another story that the New York -- somebody is going to go poking around.

Have you heard from these people, or is this just a press story?

I'm sorry, that who is --

The New York Attorney General, I think, or somebody is going to go poking around.

Is this for real, or is this just a story in the news?

Well, as I said, we receive inquiries from authorities, including the attorneys general, from time to time, and so they may very well have information they would like us to make available.

And if they do, of course we are going to be responsive to that.

You have not received any notices or anything like that?

(multiple speakers).

Well, no; there are inquiries, information requests in-house on an ongoing basis, and so we continue to make the information requested available, and we will do so.

Thanks.

Manav Patnaik, Barclays.

If I can just shift the focus away from ratings for a minute, on the Moody's Analytics side, can you remind us just in terms of what the M&A pipeline looks like?

There was some press where you guys are probably looking at another one of those outsourced services things.

But just generally, I know we ran through some of that at the investor day, but if anything has changed, in terms of what the pipeline there is?

I'll invite Mark Almeida to add any comments that he would like.

But, at a high level, I think as we communicated at investor day last year, we feel like we have filled out the need to have components of that business, and this business is positioned to grow nicely.

That being said, if we do find opportunities for synergistic, complementary businesses at reasonable prices, we would look at that.

And Mark, I don't know if there's anything else you want to --.

No, I think that's exactly right.

We are always looking at things, either things that we have proactively are intrigued by or things that are brought to us.

So beyond that, I can't really say much about the pipeline.

It is -- it looks a lot like what it usually looks at.

We have a lot of different things that we are thinking about and considering, but nothing particularly remarkable to report beyond that.

We continue to look at what we term tuck-in or bolt-on acquisitions of the size we have been doing for -- I don't think any of us are excited about anything transformative so sort of the same kind of scale as we have been looking at previously.

Okay, and then just two more in there -- so on the RD&A line item, it seems like that moves somewhat alongside, I guess, how ratings generally does.

I just wanted to know if that's the way to think about it.

And then on the ERS side, clearly, you guys, based on the guidance of this year at least, guiding some good growth.

It seems like in that segment, though, I guess, where you are helping everyone with the compliance needs, there has been -- and actually, I Googled something; I can see a lot of different companies doing a lot of things in that area.

I was just wondering if there was a way to frame competition around that, share maybe, or how to visualize the opportunity there.

First, on our D&A, I don't think looking at revenue trends and the rating agency is going to be particularly helpful there.

You will send you see, I think, more volatility in the revenue rating lines, either up or down, and relatively more stability on the RD&A line, just given the fact that it's a subscription business with very high retention rates.

So I don't think you can really correlate very well with activity levels in the rating business.

In the enterprise risk solution space, we do feel good about that business.

That's a business where we have been making a lot of investment.

We feel like we are getting very good traction there and expect to continue to grow that at a very good clip.

It is a highly competitive business.

There are lots of people that we compete with in that space.

Not the least is internal development that our customers, which are typically large banks, they do a lot of their own internal development.

So we are against other providers as well as internal build within our customer organizations.

So it's very competitive, but it's a very big and fast-growing market.

We have been talking to a number of market analysis sources about expectations for the size of that market.

And you get some very big numbers, anywhere -- we have had estimates of the size of the Risk Management Software business anywhere from $5 billion to $25 billion.

So either of those numbers for us are big numbers and we think there's a lot more share that we are going to win there.

I would just add to that, that not only do we feel we have strong expertise in the software development area, but the scope, the breadth and depth of the data that we have available is really, we think, unparalleled, and that is supportive of that business.

All right, thanks a lot, guys.

With no further questions in the phone queue, I would like to turn the conference back to Ray McDaniel for any additional or closing remarks.

Thank you.

I just want to thank everyone for joining the call today, and we will be speaking with you again in April.

Thanks.

This concludes Moody's fourth quarter and fiscal year-end earnings call.

As reminder, a replay of this call will be available after 4 PM Eastern time on Moody's website.

Thank you.