1
INVESTOR PRESENTATION
OCTOBER 2000
[MOODY'S LOGO]
2
DISCLAIMER
FORWARD-LOOKING STATEMENTS. This presentation contains information about
future expectations, plans and prospects for the Company's business and
operations that constitute forward-looking statements. The forward-looking
statements and other information are made as of October 2000, and the
Company disclaims any duty to supplement, update or revise such statements
on a going-forward basis, whether as a result of subsequent developments,
changed expectations or otherwise. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the
Company is identifying certain factors that could cause actual results to
differ, perhaps materially, from those indicated by these forward-looking
statements. Those factors include, but are not limited to, changes in the
volume of debt securities issued in domestic and/or global capital markets;
changes in interest rates and other volatility in the financial markets;
possible loss of market share through competition; introduction of
competing products or technologies by other companies; pricing pressures
from competitors and/or customers; the potential emergence of
government-sponsored credit rating agencies; proposed U.S., foreign, state
and local legislation and regulations, including those relating to
nationally recognized statistical rating organizations; the possible loss
of key employees to investment or commercial banks or elsewhere and related
compensation cost pressures; the outcome of any review by controlling tax
authorities of the company's global tax planning initiatives; the
uncertainty regarding market acceptance and revenue generating
opportunities for web-based research products; and other factors as
discussed in The New D&B Corporation Form 10 (Amendment No. 2) filed on
September 11, 2000 with the Securities and Exchange Commission and in other
filings made by the Company from time to time with the Securities and
Exchange Commission.
[MOODY'S LOGO]
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AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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DISTRIBUTION SUMMARY
- - Tax-free spin-off to DNB shareholders
- - One share of Moody's for every DNB share
- - NYSE symbol MCO
- - Approximately 162 million shares outstanding post distribution
- - Record date September 20, 2000
- - Distribution date September 30, 2000
- - Start regular way trading October 3, 2000
[MOODY'S LOGO]
The separation of Moody's from Dun & Bradstreet was a tax-free spin. It was not
an IPO. Existing shares of The Dun & Bradstreet Corporation became shares of
Moody's Corporation. For every one share held in the "old" D&B, after the spin
the shareholder holds one share in Moody's Corporation, and 1/2 share in the
"new" D&B Corporation.
Regular way trading of Moody's Corporation commenced October 3, 2000. Moody's
ticker symbol is MCO and there are approximately 162 million shares
outstanding.
5
AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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SPIN-OFF RATIONALE
- - Enhanced management focus for better resource allocation
- - Improved ability to hire, retain and motivate key personnel
- - Improved use of cash flow to expand business and return capital to
shareholders
- - Independent access to capital markets
- - "Pure Play" investment product
- - Better investor understanding and appreciation; broader analyst coverage
[MOODY'S LOGO]
Here is the rationale for the spin-off from Moody's perspective.
Moody's will be able to allocate its resources better as a separate company.
That will enhance our business by creating better customer, employee and
shareholder value.
As an example of better resource allocation, before the spin, D&B employees had
been receiving most of the stock options due to their much larger share of the
overall workforce. After the spin Moody's employees can receive a significantly
higher number of options than before at the same cost to shareholders. Moody's
recruits employees in the very competitive labor market for financial services.
We expect that being able to offer additional equity incentives that are
directly aligned with the company's financial performance should significantly
improve our ability to hire, retain and motivate key personnel. That's very
important for a financial service company.
As a second example, Moody's also generates very significant amounts of cash.
Before the spin, the cash was transferred to D&B; after the spin we will be able
to use that cash to expand the business and return capital to shareholders.
Moody's also gains independent access to the capital markets. We've completed a
$300 million five-year private placement financing at 7.61%. That financing
enabled Moody's to pay approximately one-half of Dun & Bradstreet's debt that
was assigned to Moody's in the spin. Moody's now has over $100 million in cash.
Share repurchases are expected to be the primary use for this cash. We've
announced a $250 million share repurchase program. Shares will be purchased from
time to time in the open market or in negotiated transactions, depending upon
market conditions and other factors.
The spin also creates a pure-play investment product. Moody's is the only
independent credit-rating agency which is publicly traded.
Moody's operates in a different economic and competitive environment from Dun &
Bradstreet. Strategic focus and critical success factors are different for the
two companies. Therefore, we expect that the spin will result in better investor
understanding of Moody's as a separate company than as part of Dun & Bradstreet.
Because Moody's has a very strong brand name we believe that we will have
broader analyst coverage as a separate company, including coverage from analysts
who follow financial services companies.
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AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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INVESTMENT HIGHLIGHTS
- - Long-term favorable world capital market conditions:
- Favorable world investment climate
- Disintermediation
- Structured Finance
[MOODY'S LOGO]
This and the next slide present a summary of Moody's investment highlights. We
will be providing further information on many of these points later in the
presentation.
We believe that the current environment is very favorable for Moody's. There is
a favorable world investment climate due to economic growth in almost all areas
of the world. Economies are expanding in the United States, Europe, Australia
and Asia, other than Japan, and Japan seems stable. Economic growth causes a
favorable climate for investment. Investment financed by debt drives Moody's
revenues.
There are two other trends that are favorable to Moody's. The first trend is
that public capital markets provide capital more cheaply than banks. One reason
is that because banks are taxed throughout the world whereas pools of funds,
like pension funds and mutual funds, are generally tax pass-through vehicles.
Accordingly, companies are increasingly borrowing in the public capital
markets, rather than from banks.
For example, in the United States, banks have about a 22% share of the
investment assets. In the U.K., Switzerland, and the Netherlands banks have
about 50%. In the three largest economies of Western Europe, Germany, France
and Italy, over 70% of those assets are still held by banks. So there are
significant opportunities for disintermediation of funds from banks and into
the capital markets.
Moody's capitalizes on the opportunity by working closely with investment
banks. They are calling on companies to persuade them to try out the capital
markets for some of their debt financing. The revenue opportunity from Moody's
arises because new capital market issues will benefit from a rating, especially
if marketed internationally.
A second trend is the significant growth in structured finance. Banks and
industrial companies are removing assets from their balance sheets to raise
their returns on equity and returns on assets. In the case of financial
institutions, this transfer also reduces the capital required by regulators,
which improves the operating results.
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INVESTMENT HIGHLIGHTS (CONTINUED)
- - Excellent market position and brand
- - Stable and sustainable top and bottom line growth
- - Diversified revenue base
- - Strong track record with new product introductions
- - Significant free cash flow
- - Experienced and successful management team
[MOODY'S LOGO]
Moody's has an excellent market position and brand. Globally, we're one of the
two leading credit rating agencies. We estimate that our market share is about
37%; S&P's is about 42%. This is market share calculated as a percent of total
estimated industry revenues. Since in most capital markets traditionally
issuers seek two ratings, Moody's market coverage in many markets is close to
100%.
We have stable top and bottom line growth. We believe that our growth is very
sustainable.
Our revenue base is diversified both geographically and by product line.
Moody's has a strong record of new product introduction.
We have significant free cash flow and intend to return excess capital to our
shareholders.
Moody's has an experienced and successful management team. The average tenure
of the senior people who manage the rating groups is over 12 years.
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AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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BUSINESS OVERVIEW
- - Leading global provider of credit ratings and analysis on over $30 trillion in
debt
- 85,000 securities
- 100 countries
- 4,200 corporate relationships
- 68,000 public finance obligations
- - Leading publisher of investor-oriented credit research to over 2,800 companies
with over 15,600 users globally
- - Named leading rating agency by Institutional Investor magazine for last five
consecutive years
[MOODY'S LOGO]
Here are a few fast facts about Moody's business.
Moody's rates over $30 trillion of the world's debts.
Moody's rates 100 countries.
Moody's has 4,200 corporate relationships.
We also rate 68,000 public finance obligations.
We publish thousands of pieces of credit research each year. 2800 companies
throughout the world purchase our research and there are over 15,000 individual
users within those companies.
Moody's has been named the leading rating agency by Institutional Investor
magazine for the last five years. We believe that investors view Moody's to be
the leading rating agency because Moody's opinions are considered somewhat more
forthright and perceptive by buy-side investors.
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MOODY'S BUSINESS MODEL
Issuers
Ratings
~ 90% Revenues
-
[ARROW GRAPHIC] Financial Instruments [Moody's LOGO]
Moody's Investors Service
Intermediaries
[ARROW GRAPHIC] Financial Instruments
Research & Opinion
Products ~ 10% Revenues
-
Investors
Note: Does not include Moody's Risk Management Services
[MOODY'S LOGO]
This is a graphic representation of Moody's business model.
About 90% of our revenues come from ratings and about 10% from research and
opinion products.
While issuers are very important to Moody's business model, we do provide
extensive services to investors. Moody's provides investors with one-on-one
access to analyst sand distributes its opinions through teleconferences,
seminars and attendance at industry conferences. This provides investors with a
direct communication channel to the rating agency and creates a market
expectation for issuers to seek a rating before issuing fixed income securities.
Moody's also works very closely with intermediaries because in some areas of
the market, especially structured finance, intermediaries have significant
impact on the deal flow.
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MOODY'S IS A GLOBAL ORGANIZATION
[WORLD MAP GRAPHIC with COUNTRY PLOTPOINTS]
England
Canada
Germany
China
Czech Republic
United States
France
Korea
Italy
Spain
Japan
Mexico
Cyprus
Hong Kong
India
Chile
Brazil
Singapore
Argentina
Australia
- - 700 analysts
- - 1,500 + staff
- - 14 countries
- - 6 Joint Ventures
[MOODY'S LOGO]
Moody's is a global organization. Moody's has about 700 credit analysts out of
a total staff of over 1,500. We're present in 14 countries, all the major
capital market centers in the world, and we have six joint ventures in Chile,
Argentina, the Czech Republic, India, China, and Korea.
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BUSINESS AND GROWTH STRATEGY
- - Capitalize on growth in worldwide capital markets
- - New product introductions
- - Leverage and extend the Moody's brand
- - Apply technology to improve customer value
[MOODY'S LOGO]
Here are the cornerstones of Moody's business and growth strategy. Our strategy
is:
FIRST, to capitalize on the growth of the worldwide capital markets.
Moody's will focus strongly on growth in international capital markets, which
are expected to grow faster than the U.S. capital markets. We expect revenue
growth of about 20% per year outside the U.S. and in the high single digits
within the U.S. This expectation is based mainly on continued economic growth
in the United States and Europe, return to lower interest rates and narrower
bond spreads in the United States, continued growth of the public capital
markets in Europe, continuance of Moody's high market share in the world's
principle capital markets, and successful introduction and growth of new
products. If these conditions are not present, Moody's financial results could
be significantly different.
Our main focus will be Europe. Although there are 360 million Europeans who
have almost the same per capita wealth as the average U.S. person, the public
capital markets in Europe are much smaller than the U.S. in terms of Gross
Domestic Product.
In Europe there are about 1,500 unrated companies with revenues greater than 1
billion Euros. Those companies would make very good capital market issuers. If
half of these companies come to market annually rated by two agencies, this
would correspond to a market potential of $75 million a year. Additional market
growth could ensue as companies increasingly take advantage of commercial paper
or medium-term note programs or other forms of public financing.
Similarly, the structured finance markets in the United States are many times
the size of those in Europe. European structured finance provides us with
significant revenue potential as these markets are growing rapidly in all
countries and asset types.
SECOND, to continue to introduce new products.
THIRD, to leverage and extend the Moody's brand.
And FOURTH, to apply technology to improve the value that we deliver to all our
customers: issuers, intermediaries and investors.
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SEIZING THE GLOBAL OPPORTUNITY
[INTERNATIONAL REVENUE BARGRAPH]
International Revenue International Revenue as
($ in Millions) Percent of total
1996 $ 63 18%
1997 $ 78 18%
1998 $100 20%
1999 $141 25%
2000(a) $172 30%
(a) Based on annualized 6 month results.
[MOODY'S LOGO]
Our international revenues have been growing rapidly over the last five years.
International revenues have grown from $63 million in 1996 to an annualized
$172 million this year.
International revenues as a part of our total revenues have also been growing.
Our international revenues have grown from 18% of our total revenues in 1996 to
30% in the first half of this year.
Two thirds of our international revenues come from Europe. The other third is
equally split between: (i) Japan, (ii) Australia and the Asia, outside Japan,
and (iii) Canada, Mexico and South America.
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WELL BALANCED MIX OF REVENUES
[1999 TOTAL REVENUE PIE CHART]
Corporate Finance Ratings 29%
Structured Finance Ratings 31%
Financial Institutions and Sovereign Ratings 19%
Public Finance Ratings 10%
Opinion Research Products/Risk Management 11%
1999 TOTAL REVENUE $564 MILLION
[MOODY'S LOGO]
Moody's revenues are well diversified by business line as well as geography.
The chart shows the composition of 1999 revenues, with two large business
lines, structured finance ratings and corporate finance ratings, both around
30% of our revenues; financial institutions ratings is about 20%, public
finance and our research business are both about 10%.
The main changes in our business line mix over the last few years have been the
great growth in structured finance and the shrinking share of U.S. public
finance, as the U.S. tax-exempt securities business becomes a smaller part of
the global capital markets.
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REDUCED SENSITIVITY TO BOND ISSUANCE VOLUME
1989 REVENUE $138 MILLION
Transaction Based 93%
Non-Ratings Revenue 7%
1999 REVENUE $564 MILLION
Transaction Based 53%
Relationship Based 36%
Non-Ratings Revenue 11%
[MOODY'S LOGO]
A frequent question investors have about Moody's is sensitivity to capital
market activity.
This chart shows how Moody's has reduced its sensitivity to bond issuance volume
over time by diversifying internationally, by growing our research and risk
management businesses and by focusing more on relationship based revenues rather
than transaction based revenues.
In our research and risk management services businesses, revenues do not
fluctuate with capital markets activity.
In the ratings business we have introduced ratings that are not transaction
related because they rate an entire institution rather than a particular issue.
Examples are bank financial strength ratings, insurance claims paying ratings,
and debt mutual fund ratings.
We have also changed our pricing structure by introducing frequent issuer
programs. Large issuers pay an annual fixed fee, committing to get all their
upcoming issues rated, and then pay reduced fees on a per-transaction basis.
Also in the category of annual fees are the "surveillance fees" which we charge
to monitor the performance of assets in structured finance transactions.
The result of these efforts has been to reduce Moody's sensitivity to capital
market activity. In 1989 our revenues were over 90% based on transaction
activity. We've been able to reduce that to slightly over 50% last year.
There are two reasons why the transaction based revenue percentage is still as
high as 50+%. First, structured finance revenues have been growing rapidly over
the last years and are mainly transaction based. Second, Moody's makes policy
decisions about how much revenue it wants to move into relationship based
programs. Transaction based revenues tend to be more volatile over time, but
are also higher on an absolute basis.
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GROWTH BY REGION AND MARKET
CAGR 1996-1999
BY REGION
United States 14%
Europe 35%
Other Non-U.S. 25%
BY MARKET
Corporate Finance 17%
Structured Finance 31%
Fin'l Inst/Sovereign 14%
Public Finance 0%
Research/Risk Mgmt 17%
[MOODY'S LOGO]
This chart shows Moody's revenue growth by region and by line of business.
Areas of significant growth were Europe from a regional perspective and
Structured Finance from a product perspective. In the United States public
finance revenues have been flat. This is due to the fact that public finance is
a declining part of the worldwide capital markets. However, Moody's believes it
still holds the leading market share in that area.
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SUCCESSFUL RECORD OF PRODUCT INNOVATION
Revenue ($ in Millions)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Core Products 73.4 86.9 88.2 77.8 113.1 150.5 160.2 141.6 143.6 171.4 204.2 222.7 238.9
New Products and
Product Extensions 42.2 44.4 50.1 77.4 75.1 96.2 137.7 138.8 150.5 178.5 219 272.9 325.1
[MOODY'S LOGO]
This chart shows Moody's revenues from our core products, defined as corporate
and public finance bonds and short-term ratings, in the yellow. It shows
revenues from new products and product extensions in the light blue. New
products and product extensions include: bank loans, opinion products, program
pricing, relationship pricing, structured finance and risk management. Over
time we have complemented our core product growth with a stream of successful
new product introductions and product extensions.
Most recently we have introduced two blockbuster new products: credit
derivative ratings and syndicated bank loan ratings.
Revenues from credit derivatives ratings (collateralized loan and bond
obligations) have grown from $10 million in 1997 to $20 million in 1998 to $37
million in 1999. This product is still growing, though at a lower rate, this
year.
In the past syndicated bank loans were not rated. Recently the key intermediary
banks have found that rated bank loans have increased secondary market
liquidity and are preferred by investors. Moody's now rates most of the
syndicated bank loans. Moody's revenues from bank loan ratings have grown from
less than $2 million in 1997 to about $5 million in 1998 and reached over $13
million in 1999.
Moody's bank loan product has helped to offset declines in rating fees from
high yield issuance, as issuance in that market has slowed. In 1999 growth in
bank loan revenues offset all of the decline. This year, with a significant
decline in high yield issuance, bank loan ratings still offset about half the
decline.
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CONTINUED LEVERAGING OF THE BRAND
- - New rating products
- - Expansion of research products
- - Consulting products
- - Internet enhanced products and services
- - Risk management services
[MOODY'S LOGO]
Moody's is a well-known and highly respected brand around the world. We will
leverage the brand.
We are introducing new rating products. We expect capital markets growth in
project finance so we're positioning our resources in this growing capital
markets specialty.
We are also developing and marketing different types of ratings. An example is
national scale ratings, where we rate the relative creditworthiness of a company
within a country. This product will be provide value to issuers and investors,
especially in markets with low country credit ceilings.
We're also investigating deconstructing our traditional ratings. Our traditional
ratings are a combination of probability of default and severity, or the amount
of loss that a fixed income investor could expect in the event of default. To
have separate ratings for each of these factors could be useful, particularly in
high yield markets.
We're expanding our research products, leveraging our large customer base. We're
developing more research products internally, and also licensing products from
third parties.
We have started to market consulting products. Our Rating Assessment Service
provides issuers with a definitive rating for major transactions they are
considering. Having a definitive answer with respect to rating will assist
management, the Board of Directors and investment bankers in their evaluation of
a potential transaction. Another consulting product will provide corporate
treasurers with independent and qualified advice regarding their derivative
exposures. Due to our strong expertise in Structured Finance, we are
particularly qualified to offer this service.
We are increasingly using the Internet to deliver our research products. Most of
our U.S. customers have converted to the Internet. Instant access and no
requirements to file paper provide our customers with more value. We've also
been able to reduce our costs due to smaller press runs for research and lower
mailing and delivery expenses.
Our main brand extension effort is Moody's Risk Management Service ("MRMS").
MRMS provides services to commercial banks and other financial institutions
supporting their middle market lending. We provide software products to assist
loan origination, credit training to improve lending skills of our customers,
and a risk score which enables them to better manage their credit exposures and
their credit portfolios. MRMS currently has revenues of $20 million; we're
investing $7-1/2 million in MRMS this year. We have a business plan to take the
MRMS business to $50 million in revenues by 2003 with high single digit margins.
Achievement of this revenue and profit growth requires continuing growth of
revenues from the MRMS software and credit training products and growth of the
market for risk scores in middle market lending and attainment of significant
market share both in the United States and Europe. If any of these requirements
are not met, MRMS financial results could differ significantly different from
the planned results.
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AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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STRONG HISTORICAL FINANCIAL PERFORMANCE
ANNUAL GROWTH
-------------------
REVENUE EBIT
LAST 20 YEARS 17% 17%
LAST 15 YEARS 17 17
LAST 10 YEARS 16 18
LAST 5 YEARS 15 20
Average annual growth rates
[MOODY'S LOGO]
Moody's revenue and operating income growth have been very strong over the last
20, the last 15, the last 10, and last 5 years.
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CONSISTENT HISTORICAL GROWTH
Revenue ($ in Millions)
Operating Income ($ in Millions)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Revenue 29.3 32.2 41.5 46.7 56.7 80.6 108.4 115.5 137.3 138.3
Operating Income 17.7 19.6 25.1 25.9 31.3 47.2 61.8 60.2 69.9 61.4
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Revenue 155.2 188.3 246.7 297.9 280.3 294.2 349.8 423.1 495.5 564.1
Operating Income 70.9 84.9 119.5 149.8 116.1 115 135.6 185.7 223.5 273.9
[MOODY'S LOGO]
Revenue and operating income growth have also been very consistent over the last
20 years. Since 1980 Moody's has had only one year of declining revenues, which
was 1994.
2000 has been a difficult year from a capital markets perspective. Moody's has
shown 4.1% growth for the first three quarters of this year. This was the result
of a 6% decline in U.S. rating revenues, offset by 25% growth in rating revenues
outside the U.S., 18% growth in research revenues, and strong growth in Moody's
Risk Management Services.
Moody's results in 2000 compare favorably to 1994, when capital market
conditions were somewhat similar. Due to significantly reduced sensitivity to
bond issuance volume, less dependence on public finance ratings, and
international diversification Moody's has shown positive revenue growth in 2000.
24
ANNUAL REVENUES AND OPERATING MARGIN
Revenues ($ in Millions)
Operating Income Margin (%)
1995 1996 1997 1998 1999
Revenues 294.1 349.7 423.1 495.5 564.2
Operating Income
Margin 36.2 36.2 43.5 44.7 47.9
EXCLUDES FIS, DIVESTED IN 1998.
[MOODY'S LOGO]
Over the past five years Moody's margins have improved significantly, going
from 36% in 1996 up to today's 48%.
This improvement was driven by two factors: strong double-digit revenue growth
over the time frame and an internal reorganization in late 1996, early 1997.
The reorganization combined our corporate rating area and our public finance
rating area into a single rating group. This combination generated significant
savings in administrative and infrastructure costs.
25
STRONG PROFITABILITY
EPS
-----
1997 0.52
1998 0.64
1999 0.84
Before cumulative effect of accounting change; pro forma for current capital
structure ($300MM of debt) and 44.2% tax rate; and excluding FIS which was
divested in 1998.
[MOODY'S LOGO]
Moody's has had very strong EPS growth that parallels the growth in our revenue
and operating income.
The chart shows EPS with a number of pro forma adjustments:
One is to exclude Financial Information Services, a division of Moody's which
published the Moody's manuals. It was divested in 1998.
A second is to reflect the pro forma capital structure of Moody's as a result
of the spin-off throughout the three years.
The third is to reflect Moody's effective tax rate today throughout the three
years.
26
SIGNIFICANT CASH FLOW
($ Millions)
1997 1998 1999
% of Op Income 130% 108% 109%
Op Income 184.2 221.3 270.4
Cash Flow 239.1 239 295.7
PRE-TAX CASH FLOW. EXCLUDES FIS, DIVESTED IN 1998.
[MOODY'S LOGO]
Moody's strong cash flow generation is an important investment highlight. The
chart shows cash flow, after capital expenditures and capitalized software, on
a pre-tax basis as compared to our operating income in 1997 through 1999.
For each of these years our pre-tax cash flow exceeded our operating income.
This reflects the strong working capital characteristics of the business.
Principally because of the large amount of deferred revenue that we have on our
balance sheet, Moody's has negative working capital. The deferred revenue is
primary due to the subscription nature of the research business and the upfront
annual fees charged in connection with the frequent issuer programs.
In addition, we have very low requirements for capital expenditures and
capitalized software.
27
PRO FORMA CAPITAL STRUCTURE & CREDIT STATISTICS
($ IN MILLIONS, AS OF 9/30/2000)
CASH $121
LONG TERM DEBT $300
SHAREHOLDERS' EQUITY ($261)
PRO FORMA DEBT / EBITDA 1.0 X
EBITDA / PRO FORMA INTEREST 13.0 X
CREDIT RATIOS ARE BASED ON TRAILING 12 MONTHS.
[MOODY'S LOGO]
This chart shows our pro forma capital structure as of September 30, after
giving effect to the spin and related financing.
The $121 million in cash represents primarily the proceeds from Moody's $300
million private placement in excess of the amount needed to finance our share
of Dun & Bradstreet's debt.
Moody's has negative shareholders' equity of $261 million. Moody's has
historically distributed all of its free cash flow to its parent. Over time
those cash flow distributions have exceeded Moody's earnings. The negative
shareholders' equity was further reduced by the assumption of Moody's share of
Dun & Bradstreet's debt.
Moody's credit ratios on a pro forma basis are very strong.
28
TARGETS FOR FUTURE
- - Low teens operating income growth
- - Margins stable at 1999 levels
- - Strong cash flow >=90% Net Income
- - Return of excess capital to shareholders
- Nominal dividend yield
- Systematic and special share repurchase
- - Mid-teens EPS growth [MOODY'S LOGO]
Here are Moody's long-term targets for the future. These targets do not
represent a specific forecast for 2001. Our current thinking is to make specific
forecasts for 2001 based on this year's results and after our budgeting process
for 2001 is completed.
We expect low teens revenue growth. This target is slightly lower than our
historical average, based on the fact that we are growing off a larger base of
business. This expectation is based mainly on continued economic growth in the
United States and Europe, return to lower interest rates and narrower bond
spreads in the United States, continued growth of the public capital markets in
Europe and continuance of Moody's high market share in the world's principle
capital markets and successful introduction and growth of new products. If these
conditions are not present, Moody's revenue growth could be significantly less.
We believe that we can achieve this target without the very large targeted
growth in MRMS revenues. So the targeted growth in the MRMS business, if
achieved, would provide additional shareholder value.
Our margins should be stable at the 48% level which we achieved in 1999 and the
first three quarters of 2000, so we also expect low teens operating income
growth. Achievement of this target primarily depends upon the targeted revenue
growth indicated above and Moody's ability to attract and retain personnel in
the very competitive labor market for financial services without a significant
increase in employment costs, net of productivity increases. Otherwise, Moody's
margins will decrease and operating income growth will be less than revenue
growth.
Moody's expects to continue to generate strong cash flow. We are targeting
after-tax cash flow greater than or equal to 90% of net income. That's before
any acquisitions and share repurchases. Achievement of this target depends upon
the continued growth of deferred revenue from research subscriptions and
frequent issuer programs, together with modest requirements for capital
expenditures and capitalized software; otherwise, cash flow will be less.
Our intention is to return excess capital to shareholders. An initial quarterly
dividend of 4.5 cents per share was declared on October 18th. We will
repurchase shares to offset option exercises, which we expect will require $20
to $40 million annually (net of the strike price and tax benefits), with less
required in early years and more in later years. We will also make special
share repurchases. We have announced a $250 million share repurchase program.
A combination of the low teens operating income growth and the share repurchases
should produce mid-teens EPS growth.
An alternative use of cash would be to finance acquisitions. While opportunities
for acquisitions may be sparse in the rating business, but there may be
opportunities in risk management services. We believe that we could fund any
acquisitions that we are likely to make with debt, so that acquisitions would
not preclude us from returning excess cash from operations to shareholders.
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AGENDA
- - DISTRIBUTION SUMMARY
- - SPIN-OFF RATIONALE
- - INVESTMENT HIGHLIGHTS
- - BUSINESS OVERVIEW
- - FINANCIAL SUMMARY
- - INVESTMENT RATIONALE
[MOODY'S LOGO]
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INVESTMENT RATIONALE
- - Environment Favorable: Good long-term outlook for world capital markets
- - Excellent market position and brand
- - Stable and sustainable top and bottom line growth
- - Diversified revenue base
- - Strong track record with new product introductions
- - Significant free cash flow
- - Experienced and successful management team
[MOODY'S LOGO]
The slide summarizes the investment rationale for Moody's.
Moody's benefits from the growth in the capital markets, and there is a good
long term outlook for world capital market growth.
We have an excellent market position and brand, stable and sustainable top and
bottom line growth, a diversified revenue base, a strong track record of new
product introduction, significant free cash flow, and an experienced and
successful management team.
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[MOODY'S LOGO]