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- Chairman, President and CEO
The McGraw-Hill Companies
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- This presentation includes certain forward-looking statements about the
Company’s businesses and our prospects, new products, sales, expenses,
tax rates, cash flows, prepublication investments and operating and
capital requirements. Such forward-looking statements include, but are
not limited to: the strength and sustainability of the U.S. and global
economy; the duration and depth of the current recession; Educational
Publishing’s level of success in 2009 adoptions and in open territories
and enrollment and demographic trends; the level of educational funding;
the strength of School Education including the testing market, Higher
Education, Professional and International publishing markets and the
impact of technology on them; the level of interest rates and the
strength of the economy, profit levels and the capital markets in the
U.S. and abroad; the level of success of new product development and
global expansion and strength of domestic and international markets; the
demand and market for debt ratings, including collateralized debt
obligations (“CDO”), residential and commercial mortgage and
asset-backed securities and related asset classes; the continued
difficulties in the credit markets and their impact on Standard &
Poor’s and the economy in general; the regulatory environment affecting
Standard & Poor’s; the level of merger and acquisition activity in
the U.S. and abroad; the strength of the domestic and international
advertising markets; the strength and the performance of the domestic
and international automotive markets; the volatility of the energy
marketplace; the contract value of public works, manufacturing and
single-family unit construction; the level of political advertising; and
the level of future cash flow, debt levels, manufacturing expenses,
distribution expenses, prepublication, amortization and depreciation
expense, income tax rates, capital, technology, restructuring charges
and other expenditures and prepublication cost investment.
- Actual results may differ materially from those in any forward-looking
statements because any such statements involve risks and uncertainties
and are subject to change based upon various important factors,
including, but not limited to, worldwide economic, financial, political
and regulatory conditions; currency and foreign exchange volatility; the
health of debt and equity markets, including interest rates, credit
quality and spreads, the level of liquidity, future debt issuances
including residential and commercial mortgage-backed securities and CDOs
backed by residential mortgages and related asset classes; the
implementation of an expanded regulatory scheme affecting Standard &
Poor’s ratings and services; the level of funding in the education market
(both domestically and internationally); the pace of recovery in
advertising; continued investment by the construction, automotive,
computer and aviation industries; the successful marketing of new
products, and the effect of competitive products and pricing.
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- Cost management is key
- 2009 priorities: Maintaining a strong balance sheet and preserving
liquidity
- Debt: Low and almost entirely long term
- First major repayment not due until 2012
- Free cash flow: Projecting $430 million to $450 million after
investments and dividends
- Comparable to 2008 level—despite lower earnings forecast
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- Dividend: Increased in 2009
- 36 consecutive years of dividend increases
- Continue to return cash to shareholders through dividends and share
repurchases
- $9.1 billion returned to shareholders since 1996
- Total return to shareholders has outperformed the S&P 500 by 500
basis points annually in last 10 years
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- Education: Targeted for more than $100 billion in federal stimulus
funding
- Will help restore education budgets
- Expected to benefit market in second half of 2009
- More than half of MHP’s earnings come in second half
- Encouraged by prospect of improving economy
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- Market outlook
- Changes at S&P
- Regulatory and legal situation
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- Corporate issuance up sequentially, but off year-over-year
- May versus April, corporate issuance up 128.2% in U.S. and 21.6% in
Europe
- Year-over-year, corporate issuance off 17.7% in U.S. and 16.1% in
Europe
- Year-over-year increase in May is coming from investment-grade
industrials
- Up 18.0% in U.S. and up 5.0% in Europe
- Seeing more high-yield market activity
- U.S. speculative-grade bonds increased 55.2% in May,
year-over-year
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- Market sentiment is improving and federal stimulus is contributing to
the thaw in credit markets
- TALF facilities have helped revive commercial paper and sectors of
structured market
- Asset-backed market has benefited from TALF, but overall structured
finance market activity remained low in May
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- Recent trends underscore our guidance for
S&P’s Credit Market Services transaction revenue:
- Cautiously optimistic about:
- Sustainability of new issuance in investment-grade market in U.S. and
Europe
- Some pick up in speculative-grade issuance
- Better economic conditions at end of 2009 should contribute to
increased market activity
- Year-over-year comparisons get easier
- Foreign exchange comparisons less challenging
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- Transaction revenue
- 1Q 2009: Declined 18.3%
- 2009: Expect 10% to 12% decline
- Based on second half scenario and easier comparisons
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- Non-transaction revenue is more durable:
Expect only a slight decline in 2009
- 1Q 2009: Off 3.8% and accounted for 72% of ratings’ total revenue
- Decrease due to foreign currency and a year-over-year decline in fees
from cancelled transactions
- 2009: Expect only a slight year-over-year decline in non-transaction
revenue
- Modest price increases are a factor
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- Creating a resilient portfolio is a key strategic goal
- Anticipate growth of non-ratings business
- 1Q 2009: Produced 36% of the segment’s revenue
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- Strengthening ratings practices and procedures at S&P Credit Market
Services
- Linking S&P’s unique content to create
growth opportunities, improve operating leverage
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- Established Office of the Ombudsman
- Will address concerns over potential conflicts of interest, analytical,
and governance processes
- Ombudsman reports to Chairman and CEO of MHP and to the Audit Committee
of the Board of Directors
- Changes to policy governance, compliance, criteria management, and
quality assurance
- All now independent from ratings business units
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- Created separate group to independently analyze and validate quality of
S&P models
- S&P adopted new criteria that address ratings stability or potential
of ratings volatility
- Published over a dozen “what if’” scenarios on various market segments
- Including residential mortgage-backed securities, commercial
mortgage-backed securities and credit card receivables
- S&P to publish these reports for every sector it rates
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- S&P partnered with NYU Stern
School of Business and American
College Testing to create credit
analyst certification program
- Independently administered and scored
by American College Testing
- All S&P analysts must pass both levels to act as a primary credit
analyst or vote in a ratings committee
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- Connecting and delivering our unique information to investors
- S&P wants to enable informed investment decisions through data,
analytics, indices, evaluated pricing, models and research
- FIRMS (Fixed Income and Risk Management Services) is key to unlocking
potential
- Links global credit portal, pricing services, tools and data library,
proprietary models and analytics and research services
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- S&P indices will continue to expand
- The goal: Create an index for every type of investment
- More indices and exchange-traded funds based on S&P indices in the
pipeline
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- S&P’s equity research services is focused on multi asset class
investors
- Finding new opportunities as Spitzer settlement winds down
- S&P analysts ranked No. 2 in recent Wall Street Journal
“Best on the Street” Analyst Survey
- No. 1 among all independent equity research firms
- Won in 22 different industry categories
- Some settlement firms are signing up with S&P to provide independent
research in the post-settlement period
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- MarketScope Advisor
- New online service delivering intra-day market commentary, news,
investment research and analysis to financial advisors and their
clients
- The goal: Connect content and
tools to improve our value proposition for a growing group of clients
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- Greater clarity on new regulations for credit rating agencies
- Situation is manageable and S&P is taking appropriate actions to
comply
- European Union passed regulations on April 23
- Final language for rules and interpretations is still ahead; full
compliance by early 2010
- United States: SEC issued new NRSRO rules on February 2
- Reproposed rules, amendments still pending
- Japan, Australia, Canada: Productive dialogue on new regulations
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- Main regulatory concern is global consistency
- Ratings are issued and used globally
- Underscores importance of regulatory consistency
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- Congress is formulating new legislation
- New bill proposed by Senator Reed recognizes the important role credit
ratings play in financial markets
- Bill goes beyond simple negligence by requiring knowing or reckless
misconduct
- We believe Congress and Administration should support the principle that
the well-established legal standards applicable to security analysts,
accountants and others in financial industry under securities laws also
apply to S&P and other rating
agencies
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- We could begin to see some rulings on our motions to dismiss many of the
suits before end of this year
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- For 2009:
- Slight decline in revenue
- Margin decline of 250 to 300 basis points, excluding 2008 restructuring
charges and loss related to Vista divestiture
- Low single-digit growth in expenses
- Implied operating margin of approximately 38%
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- New funding starting April 1:
- $6.1 billion for IDEA, the special education program
- $5.0 billion for Title I, programs for disadvantaged students
- $32.5 billion of the State Fiscal Stabilization Fund made available to
state governors
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- Some funds will be used to retain teachers, as well as for other
purposes
- Many of our customers anticipate using some stimulus dollars to buy
instructional materials
- Encouraging signals from the marketplace
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- El-hi market under pressure
- Could see 15% to 20% decline in el-hi market
- 2009 state new adoption market forecast:
$550 million to $600 million
- We expect to capture 30% of state new adoption market
- El-hi market down 16.4% through April 2009
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- Reduced opportunities in two key states
- Florida: Industry may realize only 20% of 6–12 literature adoption
- California: Normally buys 40% of new program in first year, but only
half that amount will be realized in 2009 K–8 reading adoption
- Expectations also diminished for second year of California math
adoption
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- 2010 state new adoption calendar could top $1 billion
- Texas approved $465.3 million for reading and literature and allocated
$347.5 million in residual sales
- Florida scheduled to buy K-12 math
- Added urgency with state’s new standards for year-end summative test
- California: Postponed reading and math from 2009 could be a positive in
2010
- 2011 state new adoption calendar tops 2010
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- Encouraging prospects for U.S. higher education market
- Enrollments are growing
- There are stimulus dollars for scholarships
- Tax credits for tuition and materials
- Technology and new content are creating revenue opportunities
- Expect 3% to 4% or more increase in college and university market
- We expect to at least match the market’s performance
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- High speed Internet increasingly important factor in college market
- Leading to the development and sale of new products and services to
students
- Combination of content and technology is key
- McGraw-Hill Connect homework management is a prime example
- Anytime, anywhere access is appealing to students
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- eBooks: More than 95% of our college textbooks can be downloaded through
CourseSmart.com
- Homework manager-type products are quickly gaining traction for students
- Powerful study tools help students get a good grade and pass the course
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- Before the benefits of federal stimulus package:
- 15% to 20% decline in 2009 for el-hi market
- 3% to 4% growth or more in 2009 for U.S. college market
- For the segment in 2009:
- 7% to 8% decline in revenue
- 300 to 400 basis point decline in margin, excluding 2008 restructuring
charges
- Implies low single-digit decline in expenses and an operating margin of
9% to 10%
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- Continued strength in global energy markets
- Platts’ real-time information and price assessments help fuel energy
markets in oil, natural gas, and power
- Print and advertising still soft
- BusinessWeek ad pages down 36% through end of May with two fewer issues
- Local, national time sales soft at TV stations
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- Revenue to decline by 5% to 6% in 2009
- 200 to 300 basis point decline in operating margin, excluding 2008
restructuring charges
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- Guidance for 2009:
- Confidence in ability to control costs underpins our guidance
- EPS in $2.20 to $2.30 range
- Revenue to decline 4% to 5%
- Divested Vista Research in May as part of ongoing portfolio review
- MHP will incur a pre-tax loss on the sale of $13.8 million, or
approximately $0.03 per diluted share of second quarter 2009 earnings
- EPS guidance excludes this loss
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Notes