Salli Schwartz - Global Head, Investor Relations Raymond McDaniel - President and Chief Executive Officer Linda Huber - Chief Financial Officer Michel Madelain - President and Chief Operating Officer, Moody's Investors Service Mark Almeida - President, Moody's Analytics

Peter Appert - Piper Jaffray William Bird - Lazard Craig Huber - Huber Research Partners Manav Patnaik - Barclays Doug Arthur - Evercore William Warmington - Raymond James

Good day, and welcome ladies and gentlemen to the Moody's Corporation third quarter 2012 earnings conference call. (Operator Instructions) 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 third quarter results for 2012. I am Salli Schwartz, Global Head of Investor Relations. Moody's released its results for the third quarter of 2012 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, 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 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 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 statements, 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.

Thank you, Salli. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's third quarter 2012 results. Linda will follow with additional financial detail and operating highlights. I will then finish with several comments on the current regulatory environment and our outlook for the remainder of 2012. After our prepared remarks, we'll be happy to respond to your questions. Third quarter revenue of $689 million, increased 30% over the prior-year period, and was the highest quarterly revenue Moody's has achieved in its history. We benefited from double-digit revenue growth in all lines of business at MIS, with particularly strong performance in corporate finance, as well as continued strong growth in all areas of Moody's Analytics. Expenses for the third quarter were $419 million, a 25% increase from the third quarter of 2011. Operating income for the third quarter was $270 million, a 38% increase from the prior-year period. Adjusted operating income for the third quarter was $294 million, up 36% from the same period last year. Diluted earnings per share of $0.81 for the third quarter, which included a $0.06 legacy tax benefit, increased 42% from the prior-year period. Excluding the legacy tax benefit in the current quarter, diluted earnings per share of $0.75 for the third quarter of 2012, were up 32% from the prior-year period. Based on strong third quarter performance, we are raising our 2012 EPS guidance range to $2.95 to $3.05, or $2.89 to $2.99, excluding legacy tax benefit in the third quarter. Turning to year-to-date performance. Revenue for the first nine months of 2012 was $2 billion, a 15% increase from the first nine months of 2011. Revenue of Moody's Investor Service was $1.4 billion for the first nine months of 2012, an increase of 14% from a year ago. Moody's Analytics revenue of $609 million was 19% higher than the prior-year period. Expenses for the first nine months of 2012 were $1.2 billion, up 16% from the prior-year period. Operating income of $817 million increased 14% from $716 million for the same period of 2011. Diluted earnings per share of $2.34 for the first nine months of 2012, which included the $0.06 legacy tax benefit increased 14% from the prior-year period. I'll now turn the call over to Linda, to provide further commentary on our financial results and other updates.

Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the quarter increased 30% to $689 million. U.S. third quarter revenue increased 37% to $375 million, while revenue outside the U.S. grew 22% to $313 million and represented 45% of Moody's total revenue, down slightly from 48% in the year-ago period. Recurring revenue of $346 million represented 50% of the total, down from 59% in the prior-year period. Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $474 million, up 35% from the prior-year period. Foreign currency translation unfavorably impacted MIS revenue by 4%. U.S. revenue for MIS increased 45% over the prior-year period. Revenue outside the U.S. increased 21% and represented 39% of total ratings revenue. Global corporate finance revenue in the third quarter increased 71% from the year-ago period to $221 million. Revenue was up 81% year-over-year in the U.S., primarily driven by issuance in the speculative grade market, including high-yield bonds and bank loans. Investment grade issuance was also strong in the U.S. The corporation is taking advantage of historically low rates. Outside the U.S., corporate finance revenue grew 53%, primarily reflecting increased investment grade issuance across all regions. Global structured finance revenue for the third quarter was $93 million, 14% above the prior-year period. In the U.S., revenue increased 27% year-over-year, primarily due to strong issuance of commercial mortgage-backed securities and collateralized loan obligation. International structured finance revenue was essentially flat to the prior-year period. Global financial institutions revenue of $83 million increased 15% from the same quarter of 2011. U.S. revenue was up 22% as compared to the third quarter of 2011, primarily driven by increased insurance company issuance, corporate financing and debt-funded M&A activity. Non-U.S. revenue was up 10%, primarily due…

Thanks, Linda. I'll continue with comments on our regulatory environment, which has not changed materially since the update we provided during our second quarter earnings call. In the U.S., the SEC's rulemaking pursuant to Dodd-Frank is pending. The timing is uncertain regarding final rules relevant to NRSROs as well as the feasibility study on establishing an alternative system for allocation rating assignments for structured finance products. Both banking and securities regulatory authorities continue to assess their use of ratings and regulation and are in the process of developing potential alternative measures as replacements. Turning to Europe, as discussed on previous calls, in November 2011, the European Commission released new regulatory reform proposals for the rating agency industry, commonly referred to as CRA3. The European legislative process requires that the European Parliament and the Council of Finance Ministers of the individual EU member states, each produce its own version of the text, and then enter into discussions with the Commission. During these discussions, the three institutions seek to resolve any differences among their respective drafts, and once the compromised document is produced, put to a vote. In May and June of 2012, the Council and the Parliament respectively finalized their positions on CRA3. The discussions among the three institutions are underway. However, currently we can't predict the timeline for finalization of CRA3 with any degree of precision. Additionally, it's still too early to assess what the likely outcome of these deliberations will be. As always, we will continue to advocate for globally consistent approaches that aligns with the G20 statements and directives. I'll conclude this morning's prepared remarks by discussing our full year guidance. Moody's outlook for the remainder of 2012 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending,…

(Operator Instructions) And we will take our first question from Peter Appert with Piper Jaffray.

Ray, based on the guidance, obviously it implies you're seeing some pretty good momentum going into the fourth quarter. Anything interesting or different you can share with us in terms of what you're seeing in the fourth quarter in terms of assets classes or other activity in the market?

Not a whole lot of additional color I can give you, Peter, other than we continue to see good issuance pipelines, especially in corporate finance, it's obviously in terms of sequential growth from the third quarter. It's going to be difficult to achieve that matter, because the issuance was so robust in the third quarter, and we have some external events, such as the election in a couple of short months, in the fourth quarter. But nonetheless, we still see healthy pipelines. And barring something really unanticipated, I think we believe the fourth quarter will be another good quarter.

Let me speak a little bit about what we're seeing in pipelines, and then in high yield and leveraged pipeline. First looking at high grade and all this information comes from Morgan Stanley as of this morning. October, right now, stands at $78 billion of issuance for U.S. high grades and that has been the strongest October on record. The month could break $100 billion, if some big deals that are said to be in the pipeline come next week. But we did experience a warning regarding potential weather delays, which is something new. For November, expectations are about $70 billion for U.S. hybrid issuance, last year it was $77 billion and the average is about $63 billion, so a little bit above the average for November. For high yield and leveraged, last week we saw $12 billion in high-yield issuance and $9.3 billion in leverage loan, that's still very active. This week we've seen $7.5 billion both in high yield and in leverage loan. October saw $41 billion in high yields and $32 billion in leverage loans. Our Q3 issuance was a record post of financial crisis for the leveraged area, $112 billion in high-yield issuance for the third quarter and $81 billion in leverage loans. As Ray said, the fourth quarter will not be as strong as the third quarter, but will still be very active. The list of pipeline so far that can be seen for November is $19 billion in high yield and $10 billion in leverage loans. And again, a bit of concern that the first week of November could be low, due to the weather and then following with the elections, and obviously the usual watch outs for anything changing in the European situation.

I thought it was particularly noteworthy that it looked like the structured finance market seems like it's got some signs of life. Do you have a view on the sustainability or a broadening of that recovery going into '13?

The structured finance market has been showing year-over-year sequential growth, pretty steady. And I think that's an indication of good, if not spectacular recovery in that market. Commercial mortgage-backed securities, CLOs, the asset-backed market, covered bonds are the more promising sectors. We still don't anticipate a big rebound in 2013 in the residential mortgage-backed securities area. But I guess the further reason for optimism in that sector is, we seem to be moving away from some of the more regulatory-driven causes of issuance into more real market issuance, and I would take that as a sign of health.

And I guess all this gets to the big issue, Ray, which is you've enjoyed very robust performance here in the second half of '12, making the comps more challenging in '13. So do you have any early thoughts in terms of how next year could play out?

We will provide our outlook for 2013 at the beginning of the year, as we do normally. And so I'll refrain from commenting on our outlook at this point.

One last try then. On the cost side of equation, Linda, the rate of cost growth obviously has been pretty robust this year in the context of all the reasons you guys have laid out. How do we think about that going forward?

I just wanted to touch on the actual expense growth for this year. And if you look at the Q3 year-over-year, you'll see that last year we had $335 million of expenses, this year in the third quarter we had $418 million of expenses. The vast majority of that change, $59 million or 70% of that, is compensation. So very important to remember that three times this year we've increased guidance, and the main driver of expense increase is in fact the over-performance and the resulting incentive compensation, which results. Another cause of expense growth is our acquisitions, which added $18 million to the expenses in the third quarter. Now, some of that breaks out into compensation for new people, about $10 million of it. We had the increase in depreciation and amortization and some other non-comp expenses, and then we have a few other things in there. But again, if you look at the expense increase, which is 25% year-over-year, it would be 15% without the incentive compensation. So probably the best way to think about it is, if we normalize back to more normal performance last year. We try as hard as we can to have expense growth not exceed, and in fact be less than revenue growth. So we'll see where get to, as Ray said, for that in 2013. But we're mindful of expense growth, but this is a very fast growing business and we are continuing to support it.

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

Ray, I'm curious, if you think you're seeing much pull-forward effect from fiscal cliff dynamics. And then second, I was wondering, if you could just discuss kind of what needs to happen to buyback more stock?

I'll start with the pull forward. I think it's clear that we have seen pull-forward throughout this year, including in the third quarter. So firms are looking at the potential for some market uncertainty around the fiscal cliff, potentially as developments occur in Europe. And they are taking advantage of low official rates and good spreads, not historically tight spreads, but good. That being said, much of the activity that we have seen this year, most of the activity continues to be refinancing, as oppose to issuance for mergers and acquisitions, and business expansion, share repurchase, et cetera. So similar to comments I've made in the last couple of quarters, it has been a very powerful refinancing engine that we have been experiencing over the course of the year. But most of the traditional drivers of debt issuance have really not been very strong this year and so. And that's what we'll be looking for going into 2013, 2014. Linda, do you want to take the share repurchase?

On share repurchase for the third quarter, as we said, we set $25 million, which is frankly less than we had hoped. We couldn't place our systematic share repurchase program and following our Investor Day, the stock price moved quite rapidly and in fact out of our repurchase zone. Because we realized that our performance was pretty good, we could not go back into the market opportunistically. So given the revised guidance, we're hoping to get back into share repurchase market here in the fourth quarter and be able to make some progress. But all of that of course is depended on market conditions.

And we'll continue on to Craig Huber with Huber Research Partners.

I appreciate you guys breaking out the transaction versus relationship across the categories in your press release, I do have one of those similar question. If you could break apart within your four main categories, like the corporate finance breakout for high yield revenues, bank loans, investment grade by percentages, each of the categories?

Sure, Craig, we can do that. We were thinking of calling Page 14 in the earnings release, the credit table. But going on to the revenue for corporate finance third quarter of 2012; total dollar corporate finance issuance $220.7 million; investment grade comprised of $55 million of that or about 25%; high yield was $52 million or 24% of the corporate finance total; bank loans $36.5 million or 17%; and other accounts $77 million or 35%. The big movement there year-over-year for the third quarter increased in the high-yield percentage, which basically doubled as a component from last year to this year, Craig. So that's a strong driver as well as the increase in the bank loans line.

Like we do it for structured finance and financial institutions, et cetera?

Going on to structured for third quarter: total issuance $93.1 million, up from $82 million of this quarter last year; so asset-backed securities $25.7 million, 28% of the total; residential mortgage-backed securities, which does include covered bonds, $20.3 million, 22% of the total; commercial real estate finance $23.6 million, which is 25% of the total; and derivatives $23.4 million, which is 25% of the total. Now, the bigger changes there would be, as Ray had noted in the commercial real estate lines, and also interestingly in the derivatives line, we saw more CLO issuance thus far in 2012 than we did in the entire period of 2008 to 2011. In fact, last week, there were five CLOs. So that market is doing quite well. Let me go on and go to financial institutions group, total revenue for the quarter $82.7 million, banking about $57 million of that or 69%; insurance $21 million, 26% of it; and managed investments $4.6 million, about 6% of the total; and each of those lines are pretty consistent to what we saw last year. For PPIF, $77 million for the quarter, $38 million in public finance and sovereign, 49% of the total; munis $4.4 million, 6% of the total; and project and infrastructure $34.5 million, about 45% of the total; so everything now looks relatively similar, little bit of an increase in project and infrastructure. Interestingly some of that out of in Europe, we understand that the ECB bond buying has created a bit of a more favorable environment for that type of issuance in Europe. Is that everything you need, Craig.

On that front, yes. And If I could ask couple of questions please. One on incentive compensation, you mentioned $59 million up from a year ago, or you have the total numbers, $59 million versus $28 million, each of the first two quarters. First off, how does that breakdown between operating costs and SG&A within the quarter please, so that we can get a sense?

We don't disclose that Craig. Generally commissions go in SG&A, and the incentive comps attracts to what each individual person is doing for the company, but we don't have that split out.

Can you say if generally is it heavy the one way or the other?

No, we don't disclose that Craig.

Then how should we think about that number for the fourth quarter assuming you had, say the mid-point of your new guidance here?

Sure. We did $28 million and $59 million for the third quarter. We're thinking that for the fourth quarter. If we hit the mid-point of our guidance probably want to look at about $40 million for incentive compensation, which also includes a piece for profit sharing.

And then I also want to ask you generally, just big picture here, when you guys look at your cost aside from incentive compensation, what else do you consider variable. For example, you do or save an incremental 10 extra debt issuance deals here. What's your variable cost aside from incentive compensation, going over little bit extra top T&E expense, but was there anything else really?

I think the main majority of it would be what does go through the bonus line. I think, as Ray just said that each additional dollar of revenue, once we've covered the fixed cost would probably still come down to about $0.60 on the margin line, but it depends if there is anything unusual going on for that quarter, Craig.

And pacing of hiring and whether we dial that back or dial that up, it's also source of flexibility, but to the extent that we think the market conditions are reacting to short term cycles, we would want to continue to invest back in our personnel and our business. And similarly for various kinds of projects, whether they are IT-related or other projects, we have the ability in some areas to accelerate or decelerate in response to conditions.

Craig, something that might interest you, since yearend last year, excluding our acquisitions we've hired about 330 people, that's 7% growth excluding acquisitions. Interestingly, about 200 of those are for Moody's Analytics, 110 or so are for the rating agency, and only 20 of those are for shared services. So 90% plus of the people that we've added this year are all for the revenue driving part of the business, not for the staff part of the business. So that's kind of give you some idea as to the balance and what we're trying to achieve.

And my last question please. Just you gave out your the backlogs out there. I'm curious, if you could talk a little bit further about the fiscal cliff issue, the debt issuance that's going to get raised here in Washington D.C. The election, just in general, what's your thought as we get later in this year and into early next year? You sense any hesitation out there in debt issuance front, if things get pushed out, or is that all being pull-forward?

I do think there is some pull-forward. I think firms are being somewhat opportunistic. The environment is good for issuance right now. And so if you're thinking about issuance in the near-term, this is a good time to be doing it. Historically, we have not seen any correlation in bond issuance activity based on election outcomes. So that, at least in terms of what we've seen in the past would not be an important determinant of issuance activity going forward. And again, the fiscal cliff is going to inevitably create headlines just as what's going on in Europe creates headlines, and that a very short-term windows week-to-week, where the market participants are feeling more optimistic or more pessimistic. So I expect we're going to see choppiness going into the New Year, but nothing that's going to freeze up markets.

And we'll go to Manav Patnaik with Barclays.

First question, given the hiring statistics you just gave out, is that a good sense of how over the long term, sort of the break out investments being made into the businesses are going to be, just in terms if trying to model where the expense growth is going to come next year and the years forward?

Manav, looking at my colleagues here who are running the lines of business that generate revenue, I think they are probably pretty happy with those total splits. We have had increases on the staff side for regulatory compliance, IT and other such things. And we hope we've come largely thorough that as we have said on previous calls. We will continue to add headcounts to drive very strong growth in both of these businesses. But it does take investment in people and resources to achieve double-digit revenue growth, which is pretty unusual in terms of the companies that have been reporting this week. We're feeling pretty good about these numbers, but we will need to continue to invest. And hopefully yes, that will continue to go to the revenue generating part of the business.

In terms of the regulatory compliance expansion of the $15 million that you have got or incremental $15 million that you guided for this year, I understand Europe, we don't know yet, but excluding that, does that incremental $15 million imply that, other than that there is not much more incremental expense required for what we already know about?

I think we've come through some of that, but not all of it. As Ray stated in his prepared remarks, we do not yet have fully final rules on Dodd-Frank from the SEC. So it would be premature for us to say that we're through everything, yet. And as Ray also said, we don't know what the timing or the final shape of the CRA3 will be which makes it pretty difficult to put numbers on things.

At this point it's been a bit easier for us to plan and spend around the anticipated SEC rules, because we feel we have a better idea of what the final rules are likely to look like. The CRA3 situation in Europe again is more uncertain, in more of a speculative stage in terms of what the final product is going to look like, and how we will have to react at over what timeframe.

And one last one, I think you explained why I guess the share buyback guidance came down from what you said last month. I was just curious, if you could explain why the CapEx number is dropping so much?

Sure. We've basically just re-scheduled some of the things we're planning to do here going into the end of the year. We wait for final Dodd-Frank Rules, and frankly we've held some capacities to deal with that. So it's nothing more than just trying to figure out what has to go first, and what we can do going next year.

Our next question comes from Doug Arthur with Evercore.

So two questions, Ray, I'm wondering if you can just update us on CalPERS. There has been a lot of motions and moves between district court and appellate court. And so I'm just interested as to where that stands right now on a timing point of view? Then Linda, there seems like there's a lot of different trends in your financial area right now. Insurance was very strong in the third quarter. Was that a one-off thing or do you see that continuing? And this de-leveraging issue with the banks. Is that likely to keep the banking side of financial institutions slow for a while? So I'm just kind of interested in different trends there.

Sure, I'll start with CalPERS. There's not a lot new in recent months in the CalPERS litigation. As we mentioned on a prior earnings call, we filed an appeal in the California Court of Appeals seeking reversal of the lower court's decision, which deny our motion to dismiss under this anti-SLAPP statute in California. And the briefing on that appeal is not going to be completed until the end of the year. And after that the court will set a date for all arguments. So currently we don't know when the case will be argued or when it will be decided. So it's moving along quite slowly. With respect to de-leveraging and the banking sector, I'll make just a quick comment and then Linda or Michel may wish to add to that. The de-leveraging is continuing. We are seeing reduction in bank loans, particularly in Europe and the de-leveraging that's associated with that. We believe that is going to continue for a relatively long time as the banking system retrenches. The benefit of that as we've talked about is that that encourages corporations and municipal entities to go to the bond market and seek ratings. And our financial institutions area is the area that is most dominated of the ratings businesses by recurring revenue. Majority of our revenue in that area is recurring, and so we are less sensitive to the de-leveraging in that area. We also don't get the benefits of banks leveraging up when they do that, but in this environment we get the benefit of not having revenue reductions in the same degree that there is de-leveraging or retrenching.

And to follow-up Doug, insurance year-over-year in Q3 moved from $18.5 million last year to $21.3 million this year. So it's a whole $2.8 million difference. It's not enormous. The guidance for FIG now is to increase in the mid-single digits for this year, which is up from flat to slightly up, which is what we had previously. So we expect that the activity will continue. It's not the biggest grower amongst our revenue lines.

And just as a follow-up on the de-leveraging in Europe. The Yankee Bond situation where corporations in Europe are coming over to the U.S. to issue, I mean that has been strong, and is that becoming a really sizable sector for you now or not yet?

Yes, it has been strong this year and much stronger than we've seen in previous years. How enduring a phenomenon that would be I think is somewhat uncertain. Right now, more than interest and risk coming from the U.S. investors than European investors, and so the European issuers have taken advantage of that. Whether that is going to change and the issuance will revert back to the EU going forward is uncertain, but I think we're in a position to rating in either case.

Bill Warmington with Raymond James, have the next question.

A question for you on Copal, and the strong growth that you're putting up there. Once you anniversary the acquisition, what kind of organic growth rate do you think you can generate there?

I'll let Mark Almeida address that, Bill.

I don't think we've disclosed an outlook for the professional services business, which is where the Copal segment wise for 2013. But it's a relatively high growth business. It won't be our highest growth business, but it's a good strong double-digit growth business. I think that's better as much insight as we can offer at this stage.

Then one question for you on the residential and mortgage-backed security market, just your thoughts on what needs to happen there before we see that market come back in size?

I guess I'll put it in two categories. One, there are some incremental things that can be done in terms of reducing mortgage qualification limit for that converted Fannie and Freddie. And that would move more of the market to the private label market, and would be more likely to be rated. But then there is the bigger structural question of the role that the government is going to play in the mortgage market on a long-term basis. And that is a politically, and fiscally, very, very changeling side of issues that the government is going to have to deal with. And so that's why we are cautious about any sizable expansion of the RMBS market in the near-term because of the dismal political dynamics.

And then one final question on enterprise risk. Just what products within that segment are driving the growth and how long is the tails on those products?

When you say tail on the products, do you mean the sale or the actual product placement?

And the ongoing of revenue generated by the product?

Yes, well the ERS segment is doing very, very well, largely driven by regulatory driven demand that we're seeing from our banking and insurance customers. And we would expect to continue to see very healthy demand for that product at over the next couple of years.

And we'll take a follow-up from Peter Appert with Piper Jaffray.

So Ray, just a follow-on to your comments earlier about what's going on in Europe. Is it possible to get any quantification around this concept of disintermediation, and how big you see the market opportunity from that?

Well, we've talked about it not specifically in the European sense, but in terms of the impact of disintermediation on our overall revenue growth is being a couple of points. And it's both anticipating what is happening from de-leveraging, but it's also looking at the pace at, which we have been getting new rating mandates over the last few years and that has been a reasonably steady pace. And in Europe coming, it's associated more with the stress in the banking sector, and in places like Asia it has been associated more with economic growth outpacing banking system capacity. So the underlying drivers of the disintermediation changed a bit by geography, but the consequence, the overall number of ratings mandates has been increasing, as I said at a pretty steady rate.

I guess I was wondering if maybe given the turmoil in Europe, the one or two percentage point incremental revenue from disintermediation, that seems like that potentially could be conservative on the near term basis. What do you think?

No, I don't think so. I hope I am wrong. But part of the turmoil in Europe is also corporations taking a conservative posture with respect to borrowing and business. And so even though, if they were to need additional capital, or desire additional capital, they are more likely to go to the bond market. They are also in a defensive mode, and so that's an offset.

Thank you. Ladies and gentlemen, we have no additional questions. I would like to turn things back over to our speakers for any additional or closing remarks.

I just want to thank you for joining the call today. We look forward to speaking with you, again after the New Year. Thank you.

Thank you, sir. And ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. And have a great weekend.