Moody's Corporation (MCO) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Fourth Quarter and Fiscal Year-End 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 results for 2012 and our outlook for 2013. I'm 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 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 fourth quarter and full year 2012 results. Linda will follow with additional financial detail and operating highlights, and I will then speak to recent regulatory and legal developments and finish with comments on our outlook for 2013. After our prepared remarks, we'll 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 Investor 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 nontax-deductible goodwill impairment charge of $12 million or 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 Investor Service was $1.9 billion, an increase of 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 the 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'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 33% to $754 million. Foreign currency translation for the quarter was negligible. U.S. fourth quarter revenue increased 40% to $401 million, while revenue outside the U.S. 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 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 Investor 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%. U.S. revenue for MIS increased 49% to $307 million over the prior year period. Revenue outside the U.S. 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 continued to take advantage of historically low interest rates. Revenue was up 72% year-over-year in the U.S. and up 76% outside of the U.S. Global structured finance revenue for the fourth quarter was $103 million, 18% above the prior year period. In the U.S., 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. U.S. revenue was up 39%, and non-U.S. 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 U.S. primarily due to gains in project finance, while non-U.S. revenue increased 36%, reflecting growth in European infrastructure finance as issuers increasingly sought financing from the bond market as compared to banks. Turning now to Moody's Analytics. Global revenue for Moody's Analytics of $235 million was up 17% from the fourth quarter of 2011. Approximately 2/3 of MA's growth in the fourth quarter was organic. Including the impact of foreign currency translation, revenue grew 18%. U.S. revenue grew by 16% year-over-year to $94 million. Non-U.S. 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 via our Credit Review (sic) [CreditView] offering as well as strong customer retention rates in the mid-90% range. U.S. revenue was up 11%, and non-U.S. revenue was up 7% 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 U.S., and non-U.S. revenue was up 36% against the prior year period. Organic subscription revenue, which includes MA's research, data and analytics segment and certain products within MA's enterprise risk solution 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. U.S. revenue nearly tripled, while non-U.S. 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-on-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 Rheinridge [ph] trials. Expenses also included the previously mentioned nontax-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. 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, 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. And now I'll 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 667 million shares -- $1 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 of unsecured notes. As of December 31, 2012, approximately 50% of our cash holdings were maintained outside the U.S. 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'll continue with an update on regulatory and legal developments. In the U.S. 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 identified potential courses of action but noted that any changes through 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 November 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 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 in line with the G-20 statements and directives. Finally, we have received a number of questions from shareholders and analysts about the U.S. 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. We have no basis to comment on that matter. I'll 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 issue. 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 the current outlook. Our guidance assumes foreign currency translation at 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% and 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 U.S., MIS revenue is expected to increase in the high single-digit percent range, while non-U.S. 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. Our revenue from financial institutions is expected to grow 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 U.S., MA revenue is expected to increase in the high single-digit percent range, non-U.S. 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. And joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investor Service; and Mark Almeida, the President of Moody's Analytics. We'd be pleased to take any actions you may have.

[Operator Instructions] We'll take our first question from William Bird with Lazard.

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

I think we're 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 can just give kind of 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 impending complaint by the Department of Justice raising similar claims against Moody's.

We'll take our next question from Bill Warmington with Raymond James. William A. Warmington - Raymond James & Associates, Inc., Research Division: First question for you is there were some news this morning that the European Central Bank, said banks will be repaying EUR 5 billion of its emergency 3-year loan and -- over the next week. I just wanted to ask about that -- sorry, it's EUR 5 billion, about USD 6.7 billion. 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 a susceptible leader, on the positive or negative side, to changes in issuance volumes. That being said, the indications -- 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. William A. Warmington - Raymond James & Associates, Inc., Research Division: 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 the -- 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 was doing $500 million of share repurchase in 2013 would be the 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're going to have to see how it goes. Very tricky model at this point. William A. Warmington - Raymond James & Associates, Inc., Research Division: Gotcha. And that $12 million amortization charge that you mentioned, does that -- I just want to confirm, that works out to be about $0.05 after tax?

I think we're thinking it's -- yes, it's about $0.06 after tax. William A. Warmington - Raymond James & Associates, Inc., Research Division: $0.06 after tax.

Subject to rounding, Bill. But yes, $12 million, not to be tax affected. William A. Warmington - Raymond James & Associates, Inc., Research Division: And then I had one last question. It's -- are you seeing any evidence on a -- 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 to other purposes? M&A, plant expansion, something like that?

Sure. Let me talk a little bit about issuance. And I'd like to first talk about investment grade, and then I'd like to talk about high yield. We've 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 U.S. high grade, we saw $112 billion of issuance. That was the fifth largest month on record. And the expected volumes for February, polling 3 different banks -- and again, we talked to Bank of America Merrill Lynch, Citi and Morgan Stanley -- looking at an average of $67 billion for the U.S. for February. If you look at the last 7 years' average, that was about $61 billion. So that skews a little bit towards the higher end. For the first quarter, we're looking at an average of $262 billion of U.S. high-grade issuance. Again, compared to what we might see over the 7-year average, that was $234 billion. So again, first quarter in high grade is looking pretty healthy. What we're seeing so far in terms of use of proceeds is mixed. We're seeing some prefunding, 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're seeing a range sort of ranging from flattish to down 10%-ish. We are modeling revenues down for high grade in sort of the highest -- high-ish single digits. We'd like to comment that every week, we've seen positive fund flows for high grade this year, 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 quota is as good as it's ever been. $41 billion of high-grade -- excuse me, high-yield issuance in January, and volumes for February, about $23 billion of high-yield issuance. Again, we're seeing call it about 10% reduction in high-yield issuance in 2013 versus 2012. And on use of proceeds, basically the same things we've 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 yields, we are modeling revenues down 2013 over 2012 in sort of the high single-digit range. Now we would note, again, fund flows into high yields, 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.

We'll take our next question from Peter Appert with Piper Jaffray.

So Ray, can you talk at all about this 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've 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 AGs when they make information requests or have inquiries.

So the -- my understanding is that they're approaching this a little bit differently than the fraud charges that you've seen from the -- 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. The -- so the situation with New York State. You've got sort of a settlement from a few years ago. What kind of protection does that give you from further action by them?

Well, the settlement agreement itself is confidential. I -- the New York Attorney General did issue a press release summarizing the -- 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've done this before. Can -- 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's going on here. Because of that insurance accounting, we were able to take a look at our most fulsome estimate of what's 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 will be $21.5 million.

Okay. 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, is the second question?

Sure, Peter. I appreciate the questions about the business. The structured finance business had a very strong fourth quarter. We're 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. As 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've 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.

Now I'd just add that the strength is really coming out of the U.S. market as opposed to the European markets. So we will be keeping an eye on the European side, in particular, to see whether there's 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, what -- 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.

[Operator Instructions] We'll take our next question from Craig Huber with Huber Research Partners.

I have some more questions on fundamentals, as well, here. Linda, would you be so kind to break out some more segment detail here on high-yield bank loans, investment-grade, et cetera, for each of the 4 segments, just the percentage of revenues reached in the quarter?

Sure. Craig, with the notes that I already did structure, so we'll 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 MTNs and other things, 34% of it. So what we're seeing is that high yield is running quite strong, and investment grade is running strong as well. We went through structured for a previous inquiry, so we'll go through FIG. Total issuance of $86.2 million in the quarter. Banking was 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've 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 revenues. PFG and sovereigns comprised 47% of that revenue; munis, 6%; and project and infrastructure, 47%. And compared to a year ago, a little bit heavier on the project and infrastructure and a little bit lighter on the PFG and sovereigns. But also, that area is running pretty strongly for us right now. Do you want to me to do Moody's Analytics, as well, Craig?

Sure.

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

How 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 3 quarters? I have it, but I think it'd 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're going to normalize back to 100% of bonus targets. So you should see this number come off, Craig. And what we think we'd 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. Will that do it?

And then also -- no, I've got a couple more little minor ones, if I could. That's on the pricing front, what's 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's -- it really depends on the region, the product, the geography.

Yes, and I'll 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're going to see less benefit from pricing.

42, LLC: And so the pricing increase this upcoming year is what's driving maybe half of this 8% to 9% increase you're talking about for research, data and analytics for 2013? It's roughly half that pricing?

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

42, LLC: So the rest volume, then, you're saying?

And mix.

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

We'll take our next question from Doug Arthur with Evercore.

Yes. Ray, just sort of looking at -- and you've had a few questions on this already on sort of issuance trends. I mean, the comps do get quite tough as '12 of -- I mean, as you go up against '12 numbers as the year evolves, particularly in high grade and high yield in the U.S. But it looks like your international, and particularly Europe, is picking up at a number of your sectors, probably project finance, infrastructure, we talked about banking. And also, it looks like the structured market is slowly coming into form. It's -- so I guess I'm just curious as to your thoughts on kind of new areas of growth that you're starting to see, and what that might mean for '13.

Sure. 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've seen in the U.S. The mix between U.S. and non-U.S. business has shifted actually. In the U.S., it's about 60% in terms of revenues versus international, and it was at this number last year. We don't expect next year necessarily a rapid uptake of volume in Structured Finance in Europe for a variety of reasons. In term of PFG, I think the main driver continues to be this intermediation. That's more than refinancing. I think that's the difference against with what we're seeing here. And in term of infrastructure, I think that we have similar trends than the one we're seeing in -- on the corporate side basically. Again, intermediation and demand for credit, basically, which helped us effectively. 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.

Doug, this is Linda. I just wanted to comment we've got every quarter up quarter-over-quarter for the rating agency this year. 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've got up for our rating agency revenue, if that helps you.

We'll take our next question from Edward Atorino from Benchmark.

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

Sure. Interest expense, Ed, looking at nonoperating expenses, it's pretty simple. The main thing will be we did our bond deal for $500 million back in August. We're 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're going to be running about $21 million, $22 million. And that's the main difference in that line, nothing much more exciting than that.

$80 million -- in the 80s for the year?

Yes.

$80 million, yes.

Yes, that's correct.

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, the -- who's...

The New York Attorney General, I think, or somebody was 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 haven't received any notices or anything like that?

Well, there's -- there are...

[Indiscernible]

No, no, there are inquiries, information requests in-house on an ongoing basis. And so we continue to make the information requested available, and we'll do so.

We'll take our next question from Manav Patnaik with 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 sort of in terms of what the M&A pipeline looks like? I know there was some press or you guys are probably looking at another one of those outsource services things. But just generally, I know we went through some of that at the Investor Day, but if anything has changed in terms of what the pipeline there is?

Well, 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 the business is positioned to grow nicely. That being said, if we do find opportunities for synergistic, complementary businesses at reasonable prices, where -- we would look at that. And Mark, I don't know if there's anything else you want to...

No, I think that's exact right. We're always looking at things, either things that we 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're thinking about and considering, but nothing particularly remarkable to report beyond that.

And Manav, we continue to look at what we term tuck-in or bolt-on acquisitions of the sort of size we've been doing before. I don't think any of us are excited about anything transformative. So sort of the same kind of scales we've been looking at previously.

Okay. And then just 2 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 want to know if that's the right way to think about it. And then on the ERS side, it's, clearly, you guys, based on the guidance for this year at least, are guiding some good growth. It seems like in that segment, though, I guess where you're helping everyone with the compliance needs, there's been -- if I Google 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 RD&A, I don't think looking at revenue trends in the rating agency is going to be particularly helpful there. You'll tend to see, I think, more volatility in the rating revenue 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. On the -- in the enterprise risk solutions space, we do feel good about that business. That's a business where we've been making a lot of investment. We feel like we're 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're up against other providers as well as the internal build within our customer organizations. So it's very competitive, but it's a very big and fast-growing market. We've 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've 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're going to win there.

It's -- this is Ray. I would just add to that, that not only do we feel we have a 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.

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'll be speaking with you again in April. Thanks.

This concludes Moody's Fourth Quarter and Fiscal Year End 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.