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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; Educational Publishing’s level of success in 2008 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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- Time of economic uncertainty and unprecedented government intervention
- New recovery package is coming
- Difficult to pinpoint timing of recovery
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- McGraw-Hill took a $26.3 million pre-tax restructuring in 4Q 2008 ($16.4
million, or $0.05 per diluted share after tax)
- Mostly for a workforce reduction of approximately 375 positions across
the corporation
- Also took restructuring charges in second and third quarters of 2008
- Combined actions eliminated 1,045 positions in 2008 for a pre-tax
restructuring charge of $73.4 million ($45.9 million, or $0.14 per
diluted share after tax)
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- Cash flow is more than sufficient to fund operations, make investments,
pay down debt and return cash to shareholders
- MHP has paid a dividend every year since 1937 and increased it every
year since 1974
- Board will make a decision on the dividend at its next meeting on Jan
28th
- Most of our debt is long term and no major repayments are due any time
soon
- We have $1.2 billion equally divided among three senior notes due in
2012, 2017 and 2037
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- Cash flow is seasonal: Comes in strongly in second half of the year
- No change in that pattern in 2008
- MHP can access the commercial paper market at reasonable rates
- Program is backed by a $1.15 billion credit facility which was renewed
in fall 2008
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- We are closing the books on 2008 and will announce earnings on January
27
- Guidance for 2009 will be provided during our 4Q earnings call
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- Former Chairman and CEO of Ernst & Young for 17 years until his
retirement in 1994; Chairman of Legg Mason Merchant Banking, 1995-2001;
President, Chairman and Senior Advisor of Marsh, Inc., 2001-2005
- Ombudsman reports outside of S&P’s business units
- Reports to Harold McGraw III and MHP’s Audit Committee
- Will address issues and concerns raised both inside and outside the
company
- Will report annually on ombudsman’s activities
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- Convergence of content, technology and accountability has raised
expectations about American education
- Enrollments continue to rise in U.S.
- Pre-K through grade 12: Increased 0.3% to 55.9 million students in
current school year; expected to reach about 60 million by 2016
- Degree-granting higher education institutions: Increased by 1.7% to
18.3 million; projected to reach 20.4 million students by 2016
- Growth could be more robust if postsecondary enrollments increase as
unemployed workers return to school and current students remain in
school longer
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- MHP has active international publishing programs
- Will benefit from steadily growing enrollments in India, China, the
Middle East, and Latin America
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- Technology creates new opportunities
- Diversify the business
- Improve efficiency
- Create new revenue streams
- Delivering dynamic content in a broad array of digital formats
- Online courses – iPods
- eBooks – CDs
- DVDs
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- Online assignment and assessment system is being offered in nearly 15
disciplines in 2009
- Organizes all
of a courses’ practice questions, homework, quizzes and exams
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- Learning isn’t linear
- Multimedia content captures students’ imaginations and helps them retain
information
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- Instructors record lectures and assign them to students as tagged,
searchable content
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- Students can evaluate their knowledge of the concepts and fill in the
knowledge gaps
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- Promise of technology
- Increasing enrollments here and abroad
- U.S. must educate its children to remain competitive
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- Steadiest business in education market
- High level of recurring revenue for strong titles and subsequent
revisions
- Expect U.S. college and university market to grow about 3% to 4% in 2009
- Digital products will be important contributor to growth story in 2009
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- Downturn started in August 2008 after sales had been running ahead of
previous year through July
- Slump has continued; industry’s sales are down 4.0% after 11 months,
according to Association of American Publishers
- Difficult to forecast 2009 el-hi market sales due to:
- Shortfalls in state and local tax revenue
- Declining income for investment funds that states and school districts
rely on to meet variety of ongoing costs
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- Assuming mid-year state education budget cuts will affect purchasing in
the first half of 2009
- Difficult to quantify reductions due to variations in funding practices
across the states
- Nearly all states have concerns about 2009-2010 fiscal year budgets
- Most budgets go into effect on July 1 and will determine instructional
material purchases in second half of 2009
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- 2009 market opportunity was never expected to match 2008 due to a lower
state new adoption schedule
- Originally projected $850 to $900 million
- Now projected to be $725 to $775 million, a decline
of approximately 25% versus 2008
- Biggest opportunities in 2009:
- California: 1st year K-8 reading and literature and 2nd
year K-8 math
- Florida: 1st year 6-12 reading/literature
- Both states are facing budget deficits which could lead to lighter 2009
purchasing than originally forecasted
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- Open territory school districts more sensitive to economic downturns
- More dependent on local property tax revenue
- Often delay or minimize expenditures for instructional materials in
hard economic times
- Currently expect industry’s el-hi sales could decline 10% to 15% in 2009
- 2010 state new adoption market improves substantially
- We remain optimistic about longer-term prospects for education
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- Challenging 2009 for elementary/high school market with industry sales
down 10% to 15%
- 3% to 4% growth in 2009 for U.S. college market
- Likely to be counter-cyclical to the broader economic downturn
- Growing enrollments
- Growing sales of technology products and services
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- Building on leading industry position where our businesses represent the
standard or provide leading benchmarks
- Integrating products with customers’ workflow and infrastructure:
- Increases diversity
- Creates more resilient revenue streams
- Reduces dependency on cyclical advertising
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- 2009 not a political advertising year for Broadcasting
- Economic conditions will continue to challenge print
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- McGraw-Hill Construction generates premium prices for ads placed in its
new video library
- Videos are targeted at specific customers
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- A new program to create widgets for each of our businesses
- Widgets are self-contained mini applications that users grab from a
site and add to their own personal web page or computer
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- Single integrated platform provides clients self-service tools and more
user-friendly experience
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- New liquefied natural gas micro site provides targeted information to
traders
- Real-time tool enables traders to calculate prices based on geography
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- We have created a framework for growth in the B2B market
- Digital transformation is creating new opportunities
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- S&P reduced dependence on new issue volume in U.S. bond market by:
- Expanding overseas
- Developing new products and services
- Creating a deferred revenue stream by emphasizing recurring annual fees
through frequent issuer programs, surveillance fees and subscription
services
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- Leveraging S&P’s benchmarks, research, data and analytics to deliver
content and workflow solutions to global investors
- A key to expansion: S&P Investment Services
- 2007: Produced 26% of S&P’s revenue
- First nine months of 2008: Produced 33% of S&P’s revenue
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- In 2008, S&P added to its growing family of indices in:
- Equities
- Arbitrage
- Currency
- Fixed Income
- Asset Allocation
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- S&P launched more than 70 new indices through November 2008
- Led to creation of 59 exchange-traded funds (ETFs) based on our indices
- Compares to 46 ETFs for same period in 2007
- Now more than 200 ETFs based on S&P indices
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- Exchange-traded funds using S&P indices have demonstrated resilience
in 2008’s volatile market
- Declined by only 10% year-over-year to
$186 billion at end of November
- Broad market measures such as the S&P 500 are down by approximately
40%
- Two factors contributed to smaller decline
- Use of ETFs as hedging tools as traders used baskets of stocks to make
bets on direction of market
- New asset inflows from mutual funds
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- Winning combination for index services: Market volatility and
exchange-traded derivatives
- Average daily volume for major derivative contracts based on S&P
indices was 3.6 million
- 40% year-over-year increase
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- Capital IQ, Compustat and ClariFI represent major delivery platforms for
providing critical S&P assets to the buy-side, the sell-side and
corporations
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- New perspective on large amounts of data
- Scatter plot chart visualizes sector returns weighted by market
capitalization
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- One click to visualize median and average returns by sector
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- One click to visualize sector returns by beta deciles
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- Newest delivery and analytics technology in marketplace
- Integrated data model adds value to clients as they diversify exposure
across asset classes and regions
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- Creating a portfolio of products and services to meet financial
institutions’ need for credit and risk analysis
- FIRMS is benefiting from key market trends
- Disconnect between price and value for complex securities
- Regulatory calls for greater due diligence and analysis by investors
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- FIRMS is benefiting from key market trends (cont’d)
- Need for greater analysis around minimum capital requirements and
supervisory surveillance in Basel II
- New focus on repackaging, revaluation and repricing of distressed debt
- Surgical scrutiny of linkages in financial support as market sorts out
where exposure are, the roles of counterparties and obligors
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- FIRMS value proposition
- Broad and deep domain knowledge-based suite of investor-centered
capabilities
- Enable risk mitigation, cost control, alpha generation through
cross-asset analytics, research and data
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- Enhances distribution of credit ratings and research from Credit Market
Services
- Integrates and leverages fixed-income content from S&P
- Perform credit risk-driven analysis by providing sector, sub-sector,
industry and entity views to conduct surveillance and monitor
counterparty risk
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- Users can drill down to understand linkages and obligor relationships
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- Expanded view of securities and participants speeds up portfolio
surveillance
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- Growth of non-transaction revenue has helped offset decline in
transactions
- After nine months in 2008, at S&P Credit Market Services:
- Non-transaction revenue was up 8.9% to $969.2 million
- Transaction revenue declined 54.2% to
$389.2 million
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- Nearly 85% of non-transaction revenue stream at S&P Credit Market
Services has recurring components:
- Relationship fees
- Surveillance fees
- Subscriptions
- Great resilience; expect to see some growth in non-transaction revenue
in 2009
- Modest price increases will help too
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- May have more visibility in 2Q 2009 after the market has evaluated
government’s new stimulus packages
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- We are monitoring:
- Cost of interbank loans. LIBOR rate has come down but remains high
relative to fed funds rate
- Spreads on credit default swaps, speculative- and investment-grade bond
yields. Spreads need to come down to signal perception of reduced risk
- Stabilization of housing market
- Issuance pipeline. Weak in structured finance, however S&P believes
potential pent-up demand in corporate issuance
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- For 2009, S&P estimates:
- Maturing of $451 billion of investment-grade bank debt (loans and
revolvers), bonds and notes for all financial and non-financial firms
issuing in U.S.
- $177 billion of speculative-grade debt will mature
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- Broad themes worth noting:
- S&P ratings are statements of opinion, not promises or guarantees
of default probabilities. Courts have repeatedly recognized that
S&P’s ratings are entitled to protection, including the First
Amendment
- Number of cases involve decisions by investors to purchase securities
rated by S&P. Plaintiffs seek to ignore nature and limitations of
ratings
- S&P does not make buy, sell or hold recommendations on a security
nor the suitability of an instrument for investment
- S&P ratings express views on creditworthiness
- We continue to believe legal risk is low
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- Regulating credit rating agencies remains a work in progress
- S&P expects regulatory changes and initiatives to continue in 2009
and possibly even next year
- S&P is working hard to become part of the solution and is taking its
own actions
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- Last month, U.S. SEC adopted new rules for NRSROs that mandate more
disclosure of ratings histories and performance statistics and prohibit
analysts from negotiating fees with issuers
- S&P has long maintained rigorous policies regarding management of
potential conflicts of interest
- Fresh initiatives in European Union
- S&P’s continues to meet with policymakers, regulators, and
politicians here and abroad
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- We think smart regulation will help strengthen financial markets
- Would recognize global nature of financial markets and analytical
independence of rating agencies and their ratings methodologies
- Courts reaffirmed again, this time in Tel Aviv, that ratings are
independent opinions about the likelihood of future defaults
- Case involved recent downgrade by S&P Maalot, subsidiary in Israel.
Ruling upheld principle that S&P’s independent opinions cannot be
forcibly changed when an issuer disagrees
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- New opportunities for revenue diversification and growth
- New products and services from S&P Investment Services
- Non-transaction revenue to help cushion uncertainty in new issue market
in 2009
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Notes