Good day and welcome, ladies and gentlemen to the Moody's Corporation Second Quarter 2008 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 questions and answers following the presentation. I will now turn the conference over to Lisa Westlake, Vice President, Investor Relations. Please go ahead.

Thank you, Audra. Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's results for the second quarter of 2008. I am Lisa Westlake, Vice President of Investor Relations. Moody's released its results for the second quarter of 2008 this morning. The earnings release and the 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 on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we get started, I call your attention to the cautionary language set out at the end of our earnings release. Certain statements my colleagues and I make today may be forward-looking within the spirit of the Private Securities Litigation Reform Act of 1995. This act provides the Safe Harbor for such forward-looking statement. I direct your attention to the management’s discussions and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2007, and in other SEC filings made by the company from time to time. I would also like to point out that Safe Harbor statement under the Private Securities Litigation Reform Act of 1995 contained in our press release issued this morning. These set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I should point out that members of the media might be on the call this morning in a listen-only mode. I'm now pleased to turn the call over to Ray McDaniel.

Thank you, Lisa and thank you all for joining us on today's call. I'll began our prepared remarks this morning with the brief summary of Moody's second quarter results, Linda will then take you through the quarter’s operating highlights, provide some commentary on revenue and expenses and update you on our share repurchase program. I will then review recent developments in the regulatory area and finish with Moody's outlook for 2008. After that we'll be happy to respond to your questions. Moody's achieved good revenue growth in the second quarter over the first quarter but well below very challenging prior year comparables. Revenue for the quarter was $488 million, down 25% from a year ago. Strength in the investment grade corporate, financial institutions, and public and infrastructure finance ratings businesses, and good growth from Moody's Analytics were more than offset by significantly reduced issuance for structured finance securities, speculative-grade bonds and loans. Operating income for the second quarter was $234 million, a decrease of 36% year-over-year. Recurring revenue and our ongoing cost management efforts reduced the impact of weak issuance conditions on overall performance. In addition, revenue and operating income declines were slightly offset by the positive impact of foreign currency translation of approximately 200 basis points and 260 basis points respectively. Diluted earnings per share for the quarter were $0.54 and included a one-time benefit of $0.03 related to legacy tax matters. Excluding benefits relating to legacy tax matters, diluted earnings per share were $0.51 for the quarter down 33 % compared to $0.76 a year ago. Turning now to year-to-date performance, revenue for the first half of 2008 was $918 million, a decrease of 25% from the first half of 2007. Operating income of $433 million was down 35% from the same period a year ago. Foreign currency translation positively affected the changes in revenue and operating income by approximately 200 basis points and 250 basis points respectively. Diluted earnings per share of $1.03 for the first half included a benefit of $0.04 per share relating to certain legacy tax matters. Excluding legacy tax benefits from both periods, diluted earnings per share of $0.99 for the first half of 2008 decreased 28% from $1.37 from the prior year period. We're affirming out full year 2008 EPS guidance in the range of $1.90 to $2 and I will discuss details on our outlook later in the call. At this point, I will turn the call over to Linda who will provide further detail on revenue and expenses.

Thanks, Ray. I'll begin with revenue for the second quarter. Moody's U.S. revenue declined 34% year-over-year to $264 million. However, revenue from outside the U.S. was $224 million, down only 9% from year ago and represented 46% of Moody's total revenue for the quarter. Recurring revenue of $269 million was up 12% from the second quarter of 2007 and represented 55% of total revenue. Recurring revenue for the first half of 2008 increased 14% to $538 million and was 59% of total revenue. Focusing on details by segment, for Moody's Investor Service, our ratings business, revenue for the quarter was $356 million, a decline of 33% year-over-year. U.S. ratings revenue was down 42% as compared to a 17% decrease in non-U.S. ratings revenue. Revenue from outside the U.S. represented 44% of total ratings revenue. The decline in revenue was mitigated by favorable foreign currency translation of approximately 200 basis points. Global Structured Finance revenue for the second quarter was $120 million, down 56% year-over-year. U.S. Structured Finance revenue decreased 67% driven by significant declines in issuance across the most asset classes. Non-U.S. Structured Finance revenue was down 35% from the prior-year period, as declines in the European credit derivatives and commercial real estate finance sectors were partially offset by other securitization activity in the Europe, Middle East, Africa and Asia region. Global Corporate Finance revenue of $97 million for the second quarter declined 23% from a year ago. U.S. Corporate Finance revenue decreased 31% year-over-year as good growth from U.S. investment grade ratings was more than offset by high double-digit declines in revenue from speculative-grade bond and bank loan ratings. Outside the U.S., corporate finance revenue was down only 7% due primarily to declines in revenue from speculative-grade bond and bank loan ratings. Global Financial Institutions revenue of $72 million…

Thanks, Linda. I'd like to now provide a brief update on regulatory development. We continue to have active communications with regulatory authorities in the U.S. and internationally. Our recommendations regarding the role, use and performance of ratings and rating agencies proposed by the Financial Stability Forum have been endorsed by the G-8 Finance Ministers and have incorporated the recommendations of a number of global authorities including IOSCO or the International Organization of Securities Commissions. In turn, IOSCO has published a revised code of conduct for rating agencies. We believe that IOSCO generally has adopted a constructive approach in reviving the code and we're in the process of modifying our existing Moody's Code of Professional Conduct to reflect IOSCO's revision. IOSCO will monitor the implementation of the revised code and aims to publish a review later this year. This week IOSCO indicated potential approaches for their monitoring process that include arrangements for the exchange of information between National Authorities, National Securities Regulators, Cooperative Inspection Programs for rating agencies, or specialized IOSCO committee that would confer on rating agencies compliance with the code. Within the U.S., the SEC introduced a set of proposed rules in three broad areas relating to nationally recognized statistical rating organizations or NRSROs. The areas of focus are first, additional measures on managing conflicts of interest and increasing transparency; second, call to NRSROs to distinguish ratings for structured finance obligations from those of other obligation either by adopting a different rating scale or by providing additional information to investors; and third, proposals to reduce the use of and reliance on NRSRO credit ratings by the SEC and market participants. Moody's has provided our comments to the SEC on the first two areas of rule amendment and we'll provide our comments to the Commission on the remaining proposals by…

Thank you. [Operator Instructions]. We'll take our first question from Michael Meltz, JP Morgan.

Great. Ray, one clarification. I know the AG is having a conference call soon and details are scarce. Is there... is it your sense this is focused on the actual practice... the actual rating scale or alleging fraud in the business or something like that? Can you offer any more detail there and then I have a couple of actual business follow-up questions.

Michael, I apologize but I have literally not had a chance to read the complaints which has just been received as we were starting this call, so my comments are based on my understanding that the focus is on the municipal rating scale but I will have to read the complaint.

Okay. Can you talk a little bit about your performance in the quarter and what you're implying for the back half? Has there been any noticeable change in trend in July relative to how you ended Q2?

No. I think the broad answer would be we haven't seen a significant change from the latter part of the second quarter. We did have some better activity in the early part of the second quarter, April and into May. We do have some reasonable pipeline activity in some of the areas that have been under stress, but I would caution that issuance activity in the structured finance area speculative-grade bonds and loans has been lumpy. And I don't think we would identify a pattern of improved issuance activity at this point.

Okay. Linda, on the expense side, what factors should we consider in the second half that, I guess your implying expenses will ramp?

Yes. I think we want to be clear about that, Michael. We're trying to establish the right balance here between bringing expenses down but then making sure we're funding the things we need to do to ensure appropriate regulatory and compliance actions and to make sure that we get the ratings right. As we said, we see a 10% a decrease for the year. We would expect compensation expenses to more than likely continue as they have been, and I think what we’ve said previously about expenses would continue, But, we're keeping a very close handle on them obliviously.

Okay. And last question, what's the guidance on the tax rate for the back half?

Yes, we're going to keep it where we had it, Michael, which is 38.5% to 39.5%.

So it started in step to 40% or so in the quarter?

It did, but we're keeping the annual guidance where we had it, very difficult to manage the tax rate to exactly the same place every quarter.

Okay. Thanks for your time.

Next we'll move to Catriona Fallon with Citi.

Yes, hi. A quick question on depreciation, and is that expected to be down in Q3 as this must be flat in the second half of the year?

Hang on just a second, Catriona. Let me just note that we took a little bit heavier depreciation expense in the second quarter. It was in non-comps, of course. That was the result of accelerating the depreciation for closing our New Jersey office. That was a couple of million dollars and then also on the non-comp line we had some additional expenses related to our outsourcing of our data centers and then some increased professional fees. So, in terms of D&A specifically, we generally don't give a lot of guidance on that, but now we'd expect it would probably be back to a more normalish run rate.

And it will be subjected to timing of capitalization of certain projects and initiatives that we have on the technology side. Some of that is associated with compliance and meeting regulatory expectations. But the timing on that is a little bit uncertain.

Okay. And then, excuse me if missed this on the call, but I guess I was a little surprised to see the analytics business just growing 13.7%. What's really leading to that slowness there? I guess we saw strength out of McGraw-Hill yesterday and I thought that the analytics business from Moody's would be a little bit stronger as well.

Let me ask Mark Almeida to make any comments there.

Yes, Catriona, what see going on, I think we talked about this a bit at Investor Day back in June, the debt capital markets which is really our core business segment, are going... is going through a very, very difficult time as you know. And so, that's had an impact on the business. While on the one hand, it’s increased demand for the kind of services we offer to a number of our customers, we have a number of customers that are exiting from asset classes. In some cases, we've got very large customers that had simply gone out of business. And so, that's affected us. So, I think we're pleased with our overall performance that were able to maintain a good solid double-digit growth in spite of the fact we are in the worse debt capital market environment that any of us have ever experienced.

Okay. And then, again excuse me if I missed this, I had another call, but, did you give the breakdown of recurring revenue by category?

No, we didn't.

We're happy to do it. What…how would you like to have it broken out?

Just percent of corporate finance, structured finance etcetera that was recurring?

Okay. Let me do it this way, I'll do structured, corporate, financial institutions and PPIF first.

Okay.

And I'll do transactions first and relationship, if that's okay.

Yes.

So, for structured, it was 58% transaction and 42% relationship, for corporate it was 64% transaction and 46%... I am sorry, 36% relationship as we saw a bit of an up tick in corporate finance transactions, financial institutions was 48% transaction and 52% relationship and PPIF was 65% and 35%. So, the total for the rating agency was 59% and 41%. For Moody's Analytics, because of the subscription nature of the business, it was 8% transaction and 92% relationship. So, for the company as a whole, we're at 45% and 35%.

45%, transaction and 55%, relationship.

Excuse me, 55%.

Yes.

So that certainly looks like an improvement in the transaction based revenue, over Q1 and if I apply that then to the outlook for the second half, it seems that expectations for transactions will come down quite a bit for the second half.

Catriona, you are right on the numbers for the whole company for Q1. The balance was 38% transaction and 62% relationship. So, yes we did a little bit better on the transaction front in Q2 and perhaps Ray might want to comment a little bit on looking [ph] forward.

I think that what we saw in Q2 really related to up tick in issuance activity early in the quarter. We have not seen that up tick sustained. As I said, we do have a reasonable pipeline in some areas of structured finance that have been under stress and it's possible that we can get an another up tick like we saw early in the quarter but we’ve not seen a pattern that makes us confident in that kind of projection.

Thank you.

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

Hi. I just wanted to see the earnings and the expenses that you reported in the quarter, is that include the Sullivan & Cromwell investigation expenses and if so how much did that run you in the quarter?

Well, we're not going to provide information on how much but yet it does include that.

Okay. Is there other ongoing expenses in the third quarter, or was that relegated only to the second quarter?

Well. The expenses related to the matter that we're dealing with in the second quarter were second quarter only expenses but in this environment, it's a little difficult to predict whether we might have other expenses, for example a civil suit from Attorney General.

Right. Looking ahead, I realize this is uncertain, but give a view on what's going on with the GSCs [ph] do you expect to looking out longer term a larger or smaller role or share of performing mortgages once the dust settles and other ratings opportunities associated with what's going on the GSCs?

Well, as you know, we do rate the GSCs and I think it's fair to say that we're in a fairly dynamic environment in terms of what the likely sources of funding will be for the U.S. housing market going forward. I would certainly expect the GSCs continue to play a very substantial role in that process. But, the balance between conforming mortgages and mortgages that are eligible for purchase by the GSCs versus private label mortgage securitization, I think it's just too early to call. That being said, I do think the market is going to be looking for any available sources of financing and asset transfer in order to help support the housing market. And so, I would expect that we will see some creativity applied to the funding for the U.S. mortgage sector. And that might over time be beneficial to the rating agencies to the extent that the private sector is a source of badly needed capital.

Covered bonds, are those things you rate in Europe?

Yes. And covered bonds is a good example of one of the directions that the mortgage finance market might go in United States. We have seen the beginnings of some activity around covered bonds in the U.S. We do rate those in Europe. We have, I think, a robust methodology around covered bonds and that would be an opportunity. I don't expect it to be a sector of explosive growth in the near term, no.

Just one point of difference, S&P is claiming that the cost of implementing the SEC recommendations is higher than the SEC is forecasting. You're saying that the expected cost of implementing should not be incremental and material to your forecast. Is there any way to reconcile those--?

Well. Let me... let me try and amplify my comments. I think the cost with respect to compliance per say are not going to be material, in part because we have already implemented a number of compliance activities and committed resource to that which already appear in our expense base. I think what you have heard from others though, is that their... the proposals from the SEC are wide ranging and they do include areas of costs that go beyond compliance, strictly speaking, including, for example, putting data and information in machine-readable format. And that is an area where I think we would agree with the comments that you've heard and that the estimates for the incremental cost associated with that will probably be higher, perhaps materially higher than the expectations in Washington.

All Right. That's helpful. And then, last question here, question for Linda. Are you still thinking about low double-digit revenue growth in '09, something you had mentioned at the Investor Day? And also can you give us a sense of D&A expense in '09, given the Canary Wharf plan? Thank you very much.

John, I might let Ray talk a little bit about '09. It's a bit early to tell with the choppy markets that we have, but let him go ahead and answer that first. And then I'll chat a bit about Canary Wharf.

I think Linda may have just said as much as I was prepared to say on '09. It is early, it would be early for us to be trying to firm up our outlook for 2009 even in a more normalized market environment. And we certainly do not have a normal market environment currently. The recovery that we would expect to see in the markets, as you’ve heard from our prior comments, we really don't think is going to have a lot of traction in 2008. We do expect that there will be recovery in 2009 and the important question becomes when in 2009. We are watching that closely but I don't think we are in a position to put out our projection or an outlook on 2009 at this point, even though I would expect recovery, the timing being so uncertain.

And John on your question on Canary Wharf, let me just set out what we're doing. We presently have office location in Minster Court in London. Unfortunately, we won’t be incurring double rent for the first, second and third quarter of 2009 as we set out our space in the Canada Tower at Canary Wharf. We are planning for all of that, but as a result we won't start seeing depreciation on that Canary Wharf set out until the fourth quarter of 2009 and we haven't said much about what we think that depreciation is going to be. I think you're aware that we’ve said that we expect CapEx to be less than $150 million or so next year, some of that encompassing the set out for Canary Wharf. But we will do this with our usual degree of discipline and attention to detail that we did with the New York move, and the question really would be the double rent expense maybe for the first three quarters, and we'll have more to say about that as we move forward.

Next, we'll go to Edward Atorino at Benchmark Company

Hello.

Yes.

Hi, Ray. I was curios do you think there was any predetermined timing of the Connecticut General… Attorney General’s release today? Jury has [ph] made this announcement on the day you release earnings?

I don't think it's really appropriate for me to speculate on that. So, I will pass on that question, Ed.

Okay. Otherwise you'll cover it in good detail. Thank you very much

Okay.

[Operator Instructions]. We'll go next to Craig Huber at Lehman Brothers.

Hi. I've one quick question. This $10 million of accelerated depreciation for New Jersey, [inaudible] second quarter here I assume?

It's not $10 million, Craig. It's only $4 million and yes, we are... we've done with it with the second quarter.

Okay. So that is $4 million in the D&A line, inflating that in the remaining roughly $6 million, is that one you are saying?

Yes, roughly the amounts are around what you said $6 million for consulting, other professional service fees and legal. If you're looking at the other non-compensation lines, we've added, as you know, we've moved our IT hosting to [inaudible] and so we have $2 million for that as an expense item and we've got a $4 millionish as I said for the mix shift situation.

And I think Craig that your focus on the $10 million, that is going to point out, that is split between the depreciation and severance costs.

Okay. Very good. And then just back on to the Attorney General thing with Connecticut, it is my understanding that the SEC is the one who has regulatory oversight on the credit rate agencies. So, if that is the case, I assume what's the basis of this lawsuit?

Because I have not read the civil complaint yet, Craig, I cannot articulate for you the basis. But, yes, you are correct that under the Credit Rating Agency Reform Act, we are subject to SEC oversight at the federal level rather than state oversight

May be the angle here from the Attorney General standpoint that it’s more having to do with fraud with his standpoint that had pursuing for as opposed to trying to change the regulations on your guys?

Again with the caveat that I've not read the complaint, I don't think that's the case. No, I do not think it relates to fraud.

Do not, okay. And I guess just lastly on cost for the back half of the year, just review a little bit further, is there any other item that we should think about here that would may or may not increase your cost for the third and fourth quarter versus what that you saw here in the first half of the year, anything of significance you should think about?

Craig, we are all kind of looking at each other and we are... we don't really think of anything. We are being very careful to make sure, as we said, that we are reallocating expenses to the prices where they need to be to ensure that we've got a proper rigor [ph] around the ratings part of the business and that we can split the growth requirements of the Moody's Analytics business. But we think we've mentioned pretty much everything that we can see right now. Obviously, if something material comes up, we will let everybody know but we are looking at expenses as we've given guidance earlier in the call.

And then lastly, if I could, just looking at McGraw-Hill’s peer ratings, percent change of the revenues, that you saw in the last six quarters and compared into your performance, is the difference in the performance most likely because you guys have higher rating towards structured finance? And the reason that I bring this up is when you guys have done this blow out type, a very strong structured finance numbers first half of last year's you guys grew much stronger on your peer ratings business with regarding to the first half of this year you guys fall-off was significantly worse than the ratings business of McGraw-Hill?

I think that it probably is relevant to look at the transaction versus recurring revenue mix, but I would not point that solely to structured finance. A lot of the high yield bond and loan ratings are also transaction-based revenues and those areas have been soft as well.

But net over the last couple of years, are you suggesting you are not losing market share relative to your number one peer out there?

No. I don't think so, I think it's probably a difference in some of the pricing mechanisms that the different agencies have.

But… and I guess it is your sense that your mix of business accounts for structured finance is higher than its S&P ratings?

No. I don't think so. As far as I know our competitor does not break out details of it's structured finance revenue but, just looking at market coverage I would say they are roughly similar.

Okay, very good. Thank you.

And next we will move to Peter Appert at Goldman Sachs.

Thanks. Linda, can you tell us about the year-to-year change in bonus accruals both for the second quarter of this year versus last year?

Yes, we can, Peter and glad to have you back with us on the call. Incentive compensation for second quarter 2008 versus 2007 was 7% of the total comp expense as compared to 16% at this time last year. Stock compensation is 11% of the total as compared to 13% last year and all other components of compensation were 82% as compared to 70% last year. So we've shifted the mix given the challenging performance that we've seen.

Right. And the... I'm sorry, I forget in the first quarter was it smaller, the 7% versus 16%?

I'm sorry, Peter, I didn't quite hear the question could you restate it?

Yes. Was the bonus... was the reduction in the bonus accrual or the magnitude of the production bonus accrual similar in the first quarter to what you have done is the second?

We are looking for that right now. I think the answer is roughly yes versus the first quarter of '08 is what you wanted to compare to?

Yes. Just… I am trying to understand if there is any significant quarter-to-quarter impact changes in bonus accrual on a year-to-year basis?

Right. And looking at Q1 and the numbers look remarkably similar to Q2. Again, in Q2 and in Q1, 7% of incentive comp… total comp plus incentive comp. We were at 11% also in the first quarter as well as the second quarter and the numbers are roughly the same also for all other compensation. So, very close quarter-on-quarter.

Right. And then, could you give us a sense of the year-to-year change than the second quarter in the total comp expense?

Let me see here, year-over-year, it has come up quite a bit. Peter, let me... let us take if you have any follow-up let us check on that for a minute and I will come right back to you.

I guess the follow-up was just... as the year progresses, is the first half accrual rate... should that or we shouldn't think about for the second half of the year?

I think that's right, Peter. We are looking… we found your answer here and thank you for bearing with us. We are off 16% and that's what the change is versus last year, but I think…

Total comp percent?

Right. That's total comp percent.

Okay. Great. And the... are you done with the headcount reductions at this point?

We think we largely are. We may have some small things that we need to deal with, but as you recall we had said that we were reducing 275 heads. But our total headcount number for this year will come out to be pretty much flat from where we are. We, right now have about 3,500 people working here. At the end of the fourth quarter 2007 we had about 3,600 people working here and with hires that we're still continuing to make through the end of the year, we would expect that we’re going to be roughly flat.

Flat with the 3,500 number?

No, probably with the 3,600 number.

3,600 number.

3,600. Okay.

We continue to hire selectively in some areas of the business, some of it pertains to our compliance and reporting and surveillance work. We also had the acquisition of Best Quotes at the beginning of this year, which increased the headcount, obviously. So, I think a flat year-over-year number by the time we get to the end of the year is the best guidance we can give.

Yes, Peter, about 50 of those headcount are from acquisition.

Got it. And then last thing, Ray, as you think longer term about the margin potential of the business you've obviously taken some significant cost out of the business obviously the margins are highly leveraged with what the revenue our performance looks like, but in the context of modest revenue recovery in '09 and '10 how much leverage is there in the margin number? Can you get back to 50% or is that desirable?

I think it really depends on where we see growth and what's driving it. I would say that probably somewhere between the mid 40% and 50% would be my expectation over the next couple of years. I certainly would be... I would not expect and would not try to be getting above 50%, but we also want to do our best to manage through a difficult environment about where we've been giving guidance in 2008, which is the mid 40s.

Great. Thank you.

[Operator Instructions]. And at this time we have no further questions. Mr. McDaniel, I'll turn the conference back over to you for any closing remarks.

All right. I just want to thank everybody for joining us for this earnings call and we look forward to speaking with you after the third quarter. Thank you.

And that does conclude today's conference, again, thank you for your participation.