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Executives

Sally Swartz – VP Investor Relations

Ray McDaniel – Chairman, CFO

Linda Huber – Chief Financial Officer

Michelle Madelain – President, CFO, Moody’s Investors Service

Mark Almeida – President, Moody’s Analytics

Analysts

Michael Meltz – JP Morgan

William Bird – Lazard Capital

Peter Appert – Piper Jaffray

Craig Huber – Access 342

Doug Arthur – Evercore

Sloan Bohlen – Goldman Sachs

Moody’s Corporation (MCO) Q1 2011 Earnings Call April 27, 2011 11:30 AM ET

Operator

Good day and welcome ladies and gentlemen to the Moody's Corporation first quarter 2011 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 Ms. Sally Swartz, Investor Relations. Please go ahead, madam.

Sally Swartz

Thank you. Good morning everyone, and thanks for joining us on this teleconference to discuss Moody's results for 2011. I am Sally Swartz, Vice President of Investor Relations.

Moody's released its results for the first quarter of 2011 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.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 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, 2010 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'll now turn the call over to Ray McDaniel.

Ray McDaniel

Thanks Sally. Good morning, and thank you everyone for joining today’s call.

I’ll begin our remarks by summarizing Moody's first quarter 2011 results. Linda will follow with additional financial detail and operating highlights. I will then speak to recent regulatory developments and finish with comments on our outlook for 2011. After our prepared remarks, we’ll be happy to respond to your questions.

First quarter revenue of $577 million increased 21% over the prior year reflecting strong corporate debt issuance and increased structured finance ratings activity, supporting growth in Moody's investor service, and continued solid performance for Moody's Analytics. All reporting units of both MIS and MA grew in the first quarter of 2011 from the same prior year period.

Operating income for the first quarter was $250 million, 27% above the prior year period. Diluted earnings per share for the quarter were $0.67 an increase of 43% year over year. We are raising our full-year 2011 EPS guidance to a range of $2.22 to $2.32 from the prior range of $2.12 to $2.22, based on strong first quarter performance.

Our expectations for market conditions for the remainder of the year are generally unchanged from our February guidance.

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

Linda Huber

Thanks, Ray. I’ll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the quarter increased 21% to $577 million.

U.S. first quarter revenue increased 18% to $301 million, while revenue outside the U.S. grew 24% to $276 million, and represented 48% of Moody's total revenue.

Recurring revenue of $294 million represented 51% of the total compared to 59% in the prior year period.

Looking at each of our businesses, Moody's investor service revenue for the quarter was $413 million a 23% increase year over year. U.S. revenue was up 22% over the prior year period, while outside the U.S. revenue grew 25% and represented 44% of total ratings revenue.

Global Corporate Financial revenue in the first quarter increased 44% from a year ago to $182 million. Revenue grew 52% in the U.S. while outside the U.S. revenue increased 31% year over year. Growth was driven by strong issuance activity particularly in the U.S. and European investment-grade and high-yield markets.

Global Structured finance revenue for the first quarter was $89 million, 25% above the prior year period. In the U.S., revenue increased 11% year over year with improved issuance in commercial real estate finance, partially offset by declines and asset-backed securities.

Non-U.S. structured finance revenue rose 39% primarily driven by demand for rating securitization placed with government-sponsored facilities in Europe, and increased covered bond issuance.

Global Financial Institution revenue of $77 million increased 1% from the same quarter of 2010 primarily due to higher levels of insurance sector issuance abroad.

U.S. financial institution revenue declined 2% while non-U.S. revenue increased 3%.

Global revenue for public project and infrastructure finance business grew by 5% year over year to $64 million. Revenue declined 10% in the U.S. reflecting weakness in public and project finance issuance with the expiration of the Build America Bond Program and the municipal budgetary pressures. Non-U.S. revenue increased 35% primarily driven by growth in infrastructure finance.

And turning now to Moody's Analytics, global revenue for Moody's Analytics of $164 million was up 17% from the first quarter of 2010. U.S. revenue grew by 9% year over year to $71 million. Non-U.S. revenue increased 23% to $93 million and represented 57% of total Analytics revenue.

Globally, revenue from research, data, and analytics of $110 million increased by 5% from the prior year period and represented about 67% of total MA revenue. We are seeing continued demand for products across our portfolio as conditions in the financial industry improve.

Revenue from risk management software of $40 million grew 19% helped by the early completion of transactions that were expected to be realized later this year. Due to the variable nature of project timing and the concentration of revenue and a relatively small number of engagements, risk management software revenue remained subject to significant short-term volatility.

Professional services revenue increased more than fourfold to $15 million reflecting the acquisition of CSI Global Education in November 2010, as well as much stronger results in the base business.

Turning now to expenses, Moody's first quarter expenses were $327 million an increase of 17% compared to the first quarter of 2010. This increase was primarily due to increased headcount from the prior year period, higher accruals for incentive compensation reflecting the stronger 2011 full-year outlook and on-going technology spending.

Moody's reported operating margin for the quarter was 43.3% compared to 41.3% in the first quarter of 2010. Our effective tax rate for the quarter was 33.2% compared with 37.2% for the prior year period. The difference was primarily due to a higher portion of taxable income generated internationally and lower tax jurisdictions, and a reduction of U.S. state income taxes.

Now I’ll provide an update on capital allocation and stock buybacks. Moody's increased its quarterly dividend on April 26, by 22% to $0.14 per share, up from $0.11.5 per share of common stock. During the first quarter of 2011, Moody's repurchased 4.3 million shares at a total cost of $128 million for an average price of less than $30 per share. Moody's also issued 1.4 million shares under the employees stock-based compensation plan.

Outstanding shares as of March 31, 2011 total 227.8 million shares, representing a 4% decline from a year earlier. As of March 31, 2011, Moody's had 1.1 billion of share repurchase authority remaining under its current program.

At quarter end, Moody's had 1.2 billion of outstanding debt with $1 billion of additional debt capacity available under our revolving credit facility. Cash and cash equivalence was $720 million an increase of $223 million from the prior year period. Approximately 70% of our cash holdings are maintained outside the U.S.

We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity. We expect to continue to share repurchase at modest levels, subject to available cash flow, market conditions, and other on-going capital allocation decision.

And with that, I’ll turn it back over to Ray.

Ray McDaniel

Thanks, Linda. I’ll continue with an update on legislative and regulatory developments. First, in the U.S. the principal regulatory activities for 2011 affecting Moody's Investor Service will be SEC rule making under the Dodd-Frank Act. The majority of rules are now expected to be proposed through July 2011 on matters that include reporting of internal controls, transparency of ratings performance and references to credit ratings and statutes, regulations and rules.

Adoption of the proposed set of rules is expected is during the second half of 2011. While new rules entail various changes in our rating agency processes and operations and require us to adapt our business, we will not alter our fundamental business objective to provide the highest quality, credit opinions, research and analysis.

Turning to Europe, the transfer of oversight of credit rating agencies from National regulators to newly-established European securities and market authority, or ESMA ,is schedule to be effective July 2011.

We have submitted an application for registration of our EU-based entities and for authorization to endorse our non-European credit ratings so that they qualify for regulatory use by EU regulated entities. We believe that this positioning will support the efficient flow of capital across national borders and best meet the current needs of all users of credit ratings. Moody's registration process is expected to be concluded in the second quarter of 2011.

The [inaudible] and commission is also scheduled to propose new rules for the rating agency industry in the third quarter of 2011, regarding matters that include competition, business models, liability, and the use of ratings and regulations. As regulatory reviews and activity occur in other jurisdictions, we will continue advocate for globally-consistent approaches that align with the G20 statements and directives.

I’ll conclude this mornings prepared remarks by discussing our full-year guidance. Moody’s outlook for 2011 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 borrowing and securitization, and the eventual withdrawal of government sponsored economic stabilization initiatives. There’s an important degree of uncertainty surrounding these assumptions and if actual conditions differ Moody’s results for the year may differ materially from our current forecast.

As mentioned earlier, we’re revising our EPS guidance upward for the full-year 2011 to a range of $2.22 to $2.32 reflecting strong first quarter performance. Our expectations for market conditions for the remainder of the year are generally unchanged from our February guidance.

Our full-year outlook assumes foreign currency translation at end-of-quarter exchange rates. Our revenue expectations for certain areas of change based on conditions specific to those businesses and geographies. My comments highlight only those components that have been revised, and we refer you to our earnings release for a full review of our 2011 guidance.

For Moody's corporation, we now expect full-year 2011 revenue to grow in the low double-digit percent range. We do not expect early strength to continue at levels above our February guidance.

Full-year expenses are now projected to increase in the high-single digit percent range.

At Moody's Investor Service, we now expect global revenue growth in the low double-digit percent range. In the U.S. we now expect MIS revenue to increase in the mid-to-high single digit percent range, while non-U.S. revenue is expected to grow in the mid-to-high teens percent range.

Corporate finance revenue is now projected to increase in the high-teens percent range, with on-going activity driven by refinancing, mergers and acquisitions, and other capital needs.

Structured finance revenue is now expected to grow in the mid-single digit percent range, while revenue from financial institutions is now expected to increase in the high-single digit percent range. Public project and infrastructure finance revenue is now projected to grow in the mid-single digit percent range.

For Moody's Analytics, our guidance remains unchanged given the variable nature of project timing and the concentration of revenue and a relatively small number of engagements within the risk management software revenue line.

That concludes our prepared remarks. And joining us for the question and answer session are Michele Madelain, the President and Chief Operating Officer of Moody’s Investor Service, and Mark Almeida, President of Moody’s Analytics.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Michael Meltz with JP Morgan.

Michael Meltz – JP Morgan

I have three questions for you. Ray, the pickup in structure in Q1, your guidance would imply a pretty big deceleration in terms of growth in, I think, absolute dollars throughout the year. Can you just talk about what was special in Q1 and why that would decelerate?

And then secondly, on costs, Linda, the guidance, I think – back in February you talked about cost on an absolutely dollar basis ramping, kind of lifting each quarter throughout the year. Is that still expected, a kind of smooth step up in expenses?

Linda Huber

Yes, Michael, if you want to take that one first. Expenses for the first quarter were $320 million and we’re expecting 40-million-ish perhaps on top of that over the course of the year by the time you get to the fourth quarter. So yes, it would ramp in an upward slopping way between now and the end of the fourth quarter.

Ray McDaniel

And with respect to the first quarter structured finance performance, Michael, you’re correct, we do expect the first quarter is going to show higher revenue than we would see for the quarters going forward the rest of the year. And the improvement in the first quarter was primarily driven by the demand for ratings on securitization in Europe that were being placed with government sponsored facilities. And so the ratings that were mandated as a result of that applied to ratings that were already outstanding in the market in part and that contributed to the growth in the area.

That has largely been run through the system at this point, so we would expect to revert more to a run rate like we had seen in recent quarters.

Michael Meltz – JP Morgan

Okay. And then the last one, and I’ll take Appert’s question here. Your performance is considerably better than S&P’s this quarter and it’s true in the U.S. as well as internationally. Even though you didn’t give the transaction number, I assume on the transaction side, within ratings. What are you attributing that to, or do you have a thought as to why the gap has widened somewhat?

Linda Huber

Michael, let me take a shot at it. We noticed that the 10-Q from [inaudible] is out this morning Obviously, we haven’t had a chance to study it, but we have a couple of thoughts on this.

For our first quarter revenue growth for MIS, which was up $77 million, most of that, the lion’s share of that is certainly coming from corporate finance and then the rest from structured. And we can go through that in a little bit.

The main drivers of the difference over S&P as we see it is we benefit from the fact that the ECB is looking for second ratings and as Ray has spoken about, before that increased our structured finance business.

We’d also note that the two companies have different approaches to transaction and recurring revenue. As you know, we’re more tilted toward transaction revenue and that benefits us during a high-volume high-issuance market.

Thirdly, our pricing and mix changes were amplified by strong issuance, so strong activity in bank loans, high yields and other places that are particularly helpful to us. And we are seeing a continued flow of new rating requests; people looking for ratings for counter-party activities and to provide a safeguard if they’re unable to borrow at attractive rates from their local banks.

So really, a bunch of different reasons and I’ll let Ray comment further on that.

Ray McDaniel

Yeah, I just would underscore Linda’s comment that these are somewhat speculative on our part as we don’t know exactly what all of the drivers are between ourselves and our competition.

Michael Meltz – JP Morgan

Okay, thank you for your time.

Operator

And we’ll take our next question from William Bird with Lazard Capital.

William Bird – Lazard Capital

Yes, just a follow-on to Michael’s question. You know, in particular your growth outside the U.S. was really substantially higher than S&P, about triple the growth rate. So you mentioned the ECB second rating as one of those factors. Are there other factors that you think are durable that’s driving that difference?

Ray McDaniel

Yeah, we had good growth in speculative-grade ratings in Europe. I’ve mentioned in some recent quarters that while the speculative-grade market in Europe historically has not been material, it has been growing rapidly and is becoming a much more important component. That may be a source of gain.

We also had strength in international project and infrastructure finance, which is a source of gain.

And on the Moody’s Analytics side of the business, we actually have a majority of our business outside the U.S. and that not only benefited from good growth in the base business, but we also had the CSI acquisition, which contributed to international revenue.

William Bird – Lazard Capital

And Ray, could you talk a little bit about the ratings pipeline and just kind of what you’re seeing right now in business?

Ray McDaniel

Sure. It’s, as we said, a very high level. We still see generally favorable conditions in the capital markets and we expect those are going to – those conditions are going to continue through the year. I think the pipeline reflects that across our businesses. We certainly believe that we have seen pull forward in the corporate sector, both investment grade and high yield into the first quarter of the year. And that pull forward may have a dampening effect on issuance later in the year. On the other hand, we are seeing increased debt financed merger and acquisition activity and a broader set of reasons from issuers for issuing debt including share repurchase business expansion activities.

So the mix of corporate issuance is becoming more diverse and we feel that’s a positive and an offset to the pull forward that we saw in the first quarter.

On the structure and finance side, I would characterize the pipeline as being not bad. As I said, we don’t think we’re going to have the first quarter revenue run rate through the rest of the year, but we certainly have a reasonable pipeline of business over on that side.

William Bird – Lazard Capital

And Linda, I was wondering if I could just get the incentive comp accrual for the quarter?

Linda Huber

Sure. Our incentive compensation accrual for the first quarter was $29.4 million, Bill. That included about $7.5 million of incentive compensation as a result of our raising our outlook for 2011, taking up our guidance. We’ve done a little bit better than we had expected.

William Bird – Lazard Capital

And what percent of employee cost does that represent?

Linda Huber

That’s about 13% of compensation costs.

William Bird – Lazard Capital

Great. Thank you.

Operator

We’ll take our next question from Peter Appert with Piper Jaffary.

Peter Appert – Piper Jaffary

So Ray, your comment on structured financing being not bad, it seems like maybe this is overly nuanced but it seems like it should change from what you’ve been saying in recent quarters and maybe suggesting that beyond the strength you saw in the first quarter from the stuff in Europe, you are seeing some changes in the market. Is that fair and can you expand on that?

Ray McDaniel

Well, I guess, Peter, it may be as much my expectations leveling out as anything else. It’s variable. We had good growth in Europe in the first quarter and as we’ve talked about, a lot of this had to do with securitization going to government sponsored enterprises. But we also had growth in the covered bond area for example, and we think that is a more enduring source of growth. The commercial real estate finance area in the first quarter was good, both in the U.S. and internationally. CLOs, we have – are optimistic about the long-term prospects for CLOs, but whether some of these asset categories are going to show good growth in 2011, at this point probably relates not only to regulatory changes that have been put in place, but also just the economics in terms of where spreads are and whether it’s the right time for – for example, CLOs and certain forms of real estate securitization to come to market.

So economic conditions are going to dictate the timing even though we are optimistic in the longer run about some of these asset classes.

Peter Appert – Piper Jaffary

Got it. So on that front, right, given the expectations that rates presumably are going up, spreads are going to widen, can you talk about how that might impact the business then over the next several quarters in the context of rising rates?

Ray McDaniel

Yeah, I mean, we are – I think our central case if that we do not expect rates to increase significantly in the coming quarters. And in particular because of what we’re seeing in terms of corporate performance we would expect some modest spread narrowing to continue so that absolute rates probably will not change dramatically. So again, in terms of the conditions for 2011, we don’t expect big changes driven by rates.

Peter Appert – Piper Jaffary

But I guess the question, Ray, was if – when rates start to rise, is that a catalyst for issuance activity or is that a constraint on issuance activity?

Ray McDaniel

It should be a catalyst for issuance activity in certain areas of structured finance.

Peter Appert – Piper Jaffary

Great. And then last thing. On the margin front, so you’re up 200-plus basis points here in the first quarter, which is obviously the high end of the range you’ve talked about for the full year. I’m just wondering, maybe Linda, if you’re feeling a little bit more optimistic on the prospects for margin leverage both near term and over the next couple of years?

Linda Huber

Peter, let me start by doing something different and correcting something that was written this morning. We had a – we’re looking at a piece written by Sloan Bohlen that indicated that we expect our full-year margins to be 46%. That is not true. We are guiding margins 38 to 40%.

The reason, Peter, why we’re at those levels, we view first quarter as potentially being the strongest margin quarter in the year. There’re two things going on. We’re expecting the revenue view this year potentially to be perhaps U-shaped; a little bit different than what we’ve seen in previous years. And as I mentioned before, we see expenses ramping up over the course of the year.

So with all that considered, we’re at 38 to 40%. You know, we would hope that would come in at the high end, but we’ll have to see how it goes. So those two things together keep us moderated in our thoughts of what the margin outlook is for the year.

Peter Appert – Piper Jaffary

Great. And one last thing, Linda. So you’re saying the release – modest share repurchase levels, so is the first quarter modest and give me the definition of modest, please.

Linda Huber

Peter, last year we did, I think, in 2010 we did 224 million. I think that’s sort of how we define modest. We saw a good opportunity in the first quarter to repurchase 4.3 million shares of stock at 29.94 so we’re feeling pretty good about that. We’ll have to see how conditions look and what’s going on in the marketplace.

So we have some room to go and we may add a little bit to that, but I think modest is about what we did last year.

Peter Appert – Piper Jaffary

Got it. Thank you.

Operator

And we’ll take our next question from Craig Huber with Access 342.

Craig Huber – Access 342

Good morning. Linda, can you break down for us, like I’d like to ask you a percent breakdown between transaction/non-transaction across the four broad categories. That’s my first question.

Linda Huber

Sure. Starting with structure for first quarter 2011, transactions were 54% of fees where relationship was 46%. Now, interestedly, that’s an absolute reverse of what we saw in the fourth quarter of 2010 where it was backwards; transactions were 46 and relationship 54. So as Ray commented you’re seeing the pickup in activity and structure finance.

Looking at corporate, 76% transaction, 24% relationship. Financial Institutions 43% transaction, 57% relationship; and Public Project and Infrastructure 55% transaction, 45% relationship. Total for the rating agency is 62% transaction, and 38% relationship. And Moody's Analytics’ is 17% transaction, 83% relationship.

Ray McDaniel

And Craig, this is Ray. I would just add, although – you can do the math. Although the relationship percentage is down compared to transaction, the absolute dollars of relationship revenue are up year on year, both for Moody's investor service and Moody's Analytics.

Craig Huber – Access 342

And then can you also, Linda, break down if you would, the segments underneath that. The percentage of ABS or MIS, the percentage breakdown for structured corporate, etc.

Linda Huber

Yeah, sure. Let me frame this question, Craig. I want to make sure everyone understands. We’ve got about $77 million of increase in revenue in MIS for the first quarter of ’11 versus ’10. About – well 55.4 million of that is coming from the corporates area, 17.9 is coming from the structured area. So, as I said before the lion’s share is from corporate and the next piece is from structured. FIG and PPIF are relatively flat. But let me go through the flips that you’re looking for, Craig.

So, for the first quarter of 2011, investment grade was 36.5 million or 20% of corporate. Now, that’s very strongly up, that’s up 11.6 million from this time last year. High yield, $44.7 million, that’s 25%, that’s also up $11.1 million or 33% from last year. Bank loans $34.6 million or 19% of corporate revenue, up 90% from last year’s 16.4 million.

So you can see all three of those areas are up pretty dramatically. Other is at $66 million and that’s 36% of those fees and that’s up $16.3 million or 33% as well. So as you can see, all the corporate lines have shown very good growth, really driving the biggest part of MIS revenue increases.

So let’s look at structured and start with ABS. Looking at $26.7 million for ABS, 30% of those revenues, that’s up 3.6 million, R&BF at 23.1 million, 26% of structured revenues, that’s up from 14.3 million last year to 62% increase. So that’s helpful. We understand about 45% of that is from covered bonds. Commercial real estate, $19 million up from 12.3 last year, a 54% increase and derivatives at $20.6 million, that’s actually off a little bit from last year, 23% of structured finance revenues, which total 89.4. Do you want me to keep going Craig?

Craig Huber – Access 342

Yeah, could you just do the other two real quick if you would please.

Linda Huber

Sure, okay. So FIG is flattish from this time last year, $76.9 million, banking is 53.5, insurance 19.9, managed investment is 3.6.

So all of them are looking relatively like they did last year. And again, we had an increase of only $700,000 here in the financial institution’s group line.

Turning to PPIF, PFG in soverance about $30 million, that’s 46%, Muni’s 4.5 and both of those lines were down a little bit from this point last year. Project and infrastructure $30 million that was up about 20% from last year. And for total, $64.5 million for PPIF, last year at this time it was 61.4. So you see FIG and public project infrastructure are basically flattish and corporate into a lesser extend structure are really driving the changes in MIS revenue.

Craig Huber – Access 342

Thanks, Linda. And also, how did your transaction revenues do over at Asia versus your overall transaction worldwide?

Ray McDaniel

Actually Craig, I don’t have that off the top of my head, but I would say that on the Moody's Analytics side, we get a strong amount of transaction revenue coming out of Asia associated with our professional services business. And, Mark, I don’t know if you have anything you can add to that.

Mark Almeida

Only that you’re right, and I don’t have the specifics at my fingertips.

Craig Huber – Access 342

And lastly, can you just update us on where your major law cases are at right now?

Ray McDaniel

Yeah, we’ve had a couple of developments in the first quarter. First of all, the litigation on auction rate, securities known as the [inaudible] litigation. The claim against Moody's was dismissed. And then we also had a shareholders class-action or reported class action in which the class certification was denied.

So those are the principal development in the first quarter. Looking forward, we have a – we had a hearing on the Calper’s case in which following the fourth quarter hearing last year in which speech – ratings were recognized as speech. There was a second hearing in which the judge denied the plaintiff discovery. And that will be followed by a hearing in August to – for the plaintiff to make its case. We don’t whether that August hearing will result in a ruling in August from the court or not. So the next date we’re looking for is August but we don’t know what the consequences of that hearing will be, or the timing that comes from that.

Then finally, the Abadie litigation is in discovery. We expect it’s going to continue into discovery through the summer and perhaps in to the fall. So the timing on that case remains I would say, quite uncertain.

Craig Huber – Access 342

This is just a follow-up on that. What’s the total number of cases that have been dismissed and withdrawn?

Ray McDaniel

It’s in – I don’t have the exact number for you, but it’s the low 20s. All most two dozen.

Craig Huber – Access 342

Okay, great. Thank you.

Ray McDaniel

Thank you.

Operator

And we’ll take our next question from Doug Arthur, with Evercore.

Doug Arthur - Evercore

Yeah, great. Linda, do you have specifics on headcount by U.S. international in the quarter?

Linda Huber

Yes, I do, Doug. Last year fourth quarter we had a total of 4,461 employees, 2,333 U.S., 2,128 international. We finished the first quarter with net addition of only 53 heads and that’s a 1% increase in headcount. So we talked before about last year’s – 2010s 9% headcount increase. We had said 4 to 5% headcount increase total for 2011, so as you can see, we’ve lightened up on that. Total MCO headcount at the end of the first quarter was 4,514, 2,350 basically in the U.S. and 2,170 internationally basically. Pretty close to even.

Doug Arthur - Evercore

Great. And then just on the public project and infrastructure area, while it was flattish, I mean, given what was going on in the U.S. municipal market, which I guess you were down 10% there. That’s pretty impressive. And then this big surge in international infrastructure, is that sustainable?

Ray McDaniel

Yeah, and you hit on it. The public finance, the U.S. Public Finance business was down in the first quarter, not surprisingly, but we did have good growth in the project and infrastructure line. And that was international. So that offset and actually did a little better than offset the decline in the U.S. public finance business. We do think that international infrastructure project finance is going to be na area of strength, going forward. It is about the same size as the U.S. municipal business in the first quarter in terms of our revenues. And we do think that the global infrastructure needs are going to be in place for a number of years.

Doug Arthur - Evercore

Okay, great, thank you.

Operator

And we’ll take our next question from Bill Clark with KBW.

Bill Clark - KBW

I think you touched on the domestic regulatory front as far as implications for Dodd-Frank and SSC rules that are being written and discussed right now. You touched on one of them that as far as the requirements and for ratings in bank capital rules, and I wondered if you could just expand on that a little bit more. If you heard any recent information as far as what direction that might be going?

Ray McDaniel

Yeah, sure. I think the dialog that’s going on is trying to respond to the mandate under Dodd-Frank to reduce the reliance on ratings and regulation, and the requirement that government regulators and enterprises review their use of ratings and regulations with an eye to finding alternatives. As you probably know, we support that. We think that we have a healthy industry and a healthy business without the extent of use of ratings and regulations that currently exist. However, there also seems to be a real struggle to find an alternative. So we don’t know how, whether it’s a banking system regulators or SCC or others, are ultimately going to resolve that. But Moody's position is that whether ratings are ultimately used or some alternative is used, the systemic consequences from using any third-party measure of credit risk depends on how those measures are used as opposed to just what measure is chosen. So we are weighing in on this debate more on that side rather than the actual use of ratings and regulations.

Bill Clark - KBW

All right, great. Thank you.

Operator

(Operator Instructions). And as a reminder, if you like to ask a question you may press star 1 at this time. And we’ll take our next question from Sloan Bohlen, with Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Hey, good afternoon, guys, and Linda, I apologize on that, the typo, and I know we’ll get that fixed. I really just have the one question on free cash flow expectations and wondering if you’d give an update on CapEx spend for the year. And then just what’s your thought is with regard to share repurchase versus now we’ve had two consecutive quarters of that dividends increase.

Linda Huber

Sure, we take a look at our dividend every quarter and we traditionally increased our dividend in line with earnings. So that’s, that’s really what we were doing there. We’re balancing the dividend increases and the share repurchases activity. And I think I answered a question earlier for, Peter, that we would continue to see that share repurchase being modest for this year. In terms of cash flow expectations for the year, I don’t think we’ll go there specifically. Our [inaudible] is not filed yet. In terms of the levels of cash that we have, $720 million were up $60 million from the end of fourth quarter. And I would note, that cash flow has been strengthening as issuance activity has been stronger. So we feel good about our cash flow, the increase in the dividend cost us about $23 million a year, which is something we can handle quite easily. So we’ll continue to look at these things to make sure we keep them in balance, but we’re serious about the return in capital to shareholders.

Sloan Bohlen – Goldman Sachs

Okay. And then just any change to the expectations for CapEx spend in the year?

Linda Huber

I’m sorry. We had said before 75 million and we’re sticking to that.

Sloan Bohlen – Goldman Sachs

Okay. And then just one bookkeeping item. So the strength in the quarter in Moody's Analytics, you sited the CSI global acquisition. Is that – should we consider that a good run-rate going forward, or was there a bigger pop in the first quarter that you may be stepped down?

Ray McDaniel

Mark, you want to?

Mark Almeida

Yeah, that’s a pretty good run-rate for the business. It’s important to note that even without the CSI acquisition, the legacy professional service business was up more than double in the quarter. So we saw a lot of strength in the base business. And then we also got the incremental revenue from CSI, and we’ll continue to see increments on that order for the balance of the year.

Sloan Bohlen – Goldman Sachs

Okay. Great, I appreciate it. Thank you.

Ray McDaniel

Thanks.

Operator

And it appears we have no further questions at this time. I would like to turn the conference over to our presenters for any additional or closing remarks.

Ray McDaniel

Okay, thank you. Just before we end the call, I wanted to let everyone know that Moody's will be hosting investor day this year. Based on feedback, we’re going to make this by-annual event and in [inaudible], we will be attending a number of conferences in the May/June time frame. Our next investor day will be held in mid-2012. I just want to thank you all for joining the call today, and we look forward to speaking with you again in July. Thank you.

Operator

This concludes Moody's first quarter earnings call. As a reminder, a replay of this call will be available after 4:00 p.m. Eastern Time, on Moody's website. Thank you.

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