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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, 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 2007 adoptions and
in open territories and enrollment and demographic trends; the level of
educational funding; the strength of School Education, Higher Education,
Professional and International publishing markets and the impact of
technology on them; the level of interest rates and the strength of the
economic recovery, 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 mortgage and asset-backed securities and related
asset classes; 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 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, product-related 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 capital and equity markets, including future interest rate
changes and concerns regarding the credit quality of subprime mortgages
adversely impacting future debt issuances of U.S. residential mortgage
backed securities and CDOs backed by subprime 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, computer and aviation industries; the
successful marketing of new products, and the effect of competitive
products and pricing.
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- Financial Services
- What is the severity of the current downturn in credit markets?
- What is its duration?
- What are the legal risks?
- What are the regulatory risks?
- What has S&P learned from the current situation?
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- Education
- What is the outlook for el-hi and higher education markets?
- What is the opportunity for more global growth?
- What is the impact of technology?
- Information & Media
- Progress segment is making in harnessing Internet to create new
opportunities in the B2B markets?
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- Financial
- How will we manage costs in a more challenging environment?
- Appetite for stock buybacks?
- Outlook for debt, interest expense and leveraging balance sheet?
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- S&P’s chief economist David Wyss expects a “soft stretch”
- Real GDP increased 4.9% in 3Q 2007
- Wyss expects 4Q 2007 and first half 2008 GDP growth will slow from 3Q
2007
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- Degree of GDP softening hinges on:
- Consumer spending in face of higher energy costs and home mortgage
payments
- If current housing downturn extends into other sectors, like commercial
construction
- Strength of U.S. exports
- Mitigating factors:
- U.S. payrolls are continuing to rise
- Unemployment rate remains low
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- Wyss currently forecasting U.S. GDP growth of 1.9% for 2008, after 2.1%
in 2007
- Could see interest rate cut by Federal Reserve as soon as December 11 in
response to weak economy
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- Visibility on structured market remains limited
- Difficult to predict timing of any rebound in mortgage-backed
securitization and CDOs
- Extent of current retrenchment still not clear
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- A reduced appetite for complex structured products
- Tightening of credit standards by originators who remain in marketplace
- More issuance by higher quality issuers
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- Fundamentals of structured finance remain positive despite current
weakness
- May see European issuance levels recover in second half of 2008 as
spreads return to competitive levels
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- Will become larger proportion of S&P’s revenue in 2008
- Reflects growth overseas in many asset classes
- Some softness in U.S.
- Overseas expansion will continue in 2008
- Opening new offices in Dubai and Johannesburg
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- Creates three revenue opportunities
- Local markets
- Regional markets
- Cross-border opportunities
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- Expect continued growth from non-traditional products and services
- Represents about 25% of ratings revenue
- Should help mitigate risks to transaction revenue
- Non-traditional products and services include:
- Rating Evaluation Services
- Financial Strength Ratings
- Advanced analytics for insurance sector and counterparty ratings
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- Fee structure reduces S&P’s dependency on transactions
- Represented 48% of ratings revenue in first nine months of 2007
- Contributors to MHP’s unearned revenue:
- Growth of frequent issuer and surveillance programs
- MHP reported more than $1 billion in unearned revenue at end of 3Q 2007
- About 75% can be attributed to S&P
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- Corporates and public finance are key markets
- Continue to grow in 4Q 2007
- Expect more growth in U.S. and overseas in 2008
- Growth in corporates driven by:
- Ongoing refinancing
- More strategic debt-financed M&A deals
- Increased cross-border activity
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- Public finance: Positive trends
- Increasing demand for new-money issuance to fund general infrastructure
needs
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- Non-ratings accounts for 25% of Financial Services’ revenue
- Data and information
- Index services
- Equity research
- Expect solid growth from:
- Capital IQ
- Ratings Direct
- RatingsXpress
- Compustat
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- 52 new indices introduced in 2007 with more in the pipeline
- Focused on building revenue from primary markets using S&P indices
- Traded derivatives
- Exchange-traded funds
- OTC products, including commodities and real estate
- Benchmark data and custom indices
- Goal: Provide an index for every investment
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- Globalization of financial markets
- Securitization
- Disintermediation
- Privatization
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- SEC officially registered Standard & Poor’s as NRSRO under U.S.
Credit Rating Agency Reform Act of 2006
- SEC is using new authority to examine S&P’s policies and procedures
- We are cooperating fully
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- S&P will continue to work with various entities to answer questions
about policies and procedures
- U.S. Congress
- Regulators in Europe
- State attorney generals
- Other governmental agencies and representatives
- Litigations in California and Washington, DC
- Two lawsuits have been filed with federal courts, but MHP has not been
served with a complaint
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- Default of subprime loans confused with defaults on AAA-rated U.S. RMBS
securities
- No AAA-rated U.S. RMBS security has defaulted
- Through Nov 27, of 2,938 rated between
1Q 2005 and 3Q 2007, only 1.12% have been downgraded, and none
below BBB
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- S&P’s AAA ratings continue to perform better than lower ratings
- Majority of issues whose initial rating indicated higher level of risk
were downgraded
- S&P’s ratings models are publicly available online for transparency
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- “I find it odd that apparently sophisticated investors in non-prime
mortgage-backed securities now claim surprise that many non-prime
adjustable-rate mortgage borrowers are facing payment shock because of
the increase in short-term interest rates.”
- William Poole, president, Federal Reserve Bank, St. Louis
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- “What ratings do is provide an estimate of the probability of default at
some future date. Ratings do not say anything about the market liquidity
of an instrument. Nor do ratings say anything about the price volatility
of an instrument.”
- Thomas Huertas, acting managing director of wholesale and institutional
markets, U.K. Financial Services Authority
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- “Rating agencies have largely been seen as scapegoats…The technique of
scapegoating has something medieval about it, like sort of an exorcism
by which you give a simple answer to a complex problem.”
- Michel Prada, French securities regulator
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- Five federal courts have ruled that the First Amendment protects credit
rating agencies from liability claims
- S&P’s ratings are opinions about the future likelihood of default
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- We must work harder to educate the market about
- What ratings are: Forward-looking opinions
- What ratings are not: Guarantees of future performance
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- Looking for ways to enhance processes and procedures
- Studying range of voluntary actions in key areas
- Governance
- Analytics
- Education
- Information
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- 4Q 2007: High single-digit decline in revenue and some margin
contraction
- 2008 outlook:
- Visibility on structured market remains limited
- Growth prospects in corporates and public finance
- Increased contribution from international markets
- Growth in non-traditional ratings products
- Solid contribution from non-ratings
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- Consolidation and change in industry favor stable companies not heavily
burdened by debt
- Economic necessity for creating educated workforce never more urgent
- Recognition of importance contributes to growth of enrollments here and
abroad
- Emphasis on reform and accountability continue to create new
opportunities
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- Digital transformation offers
- New ways to improve our productivity
- New opportunities to produce new products for incremental revenue
- New ways to create a competitive advantage
- We are making significant investment in technology
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- Reorganized school team in 2006
- Proved itself in 2007 state new adoption market
- Captured market-leading 32% of available dollars
- Will be armed with new programs in math, reading and science for key
new adoption opportunities in 2008
- Wide spectrum of products a key to success
- Range of proven instructional materials for academic and non-academic
elementary-high school markets
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- Innovative programs leverage convergence of traditional textbook with
online digital products
- Result: Better ways to measure student performance and more
individualized standards-based classroom instruction
- Everyday Mathematics
- Technology is helping maintain competitive position
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- Everyday Mathematics
[video clip]
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- Marketplace continues to shift from
paper-and-pencil to electronic modes
- Source of incremental productivity savings
- Key differentiator in marketplace as customers seek more complex
assessment and reporting solutions
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- Schools will test science at three different grade levels beginning in
2007-2008 academic year, as mandated by NCLB
- Science is in addition to reading and math tests
- Industry will benefit from formative market
- Our Acuity program is building strong position
- Won five-year $80 million contract with New York City in 2007
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- Industry’s sales will be flat for two years in a row—unprecedented
- Rule of thumb: Open territory sales represent 50% of market and have
grown steadily in most years
- Factors influencing spending in open territory
- School’s fixed expenses are consuming larger shares of annual budgets,
leaving less for discretionary items
- Instructional materials are discretionary items in the open territory
- States do not provide separate funding for instructional materials
- Housing recession may be additional factor in state funding
- On average, state and local budgets expected to finish this year in
balance; some will face deficits in 2008
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- Efforts have ground to a halt
- Should resume early next year
- If Congress fails to reauthorize NCLB in 2008, current law will remain
until legislators revisit issue in 2009
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- Federal funding provides 5% increase for education in 2008
- Funding for state testing
- Unchanged at $407.5 million for 2007
- $411.6 million requested for 2008
- Funding for Reading First
- Expected to be cut to $400 million, down from $1 billion because of
concerns over program administration
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- 2007: Expected to grow 3% to 4%
- 2008: Need to clarify trends in open territory before forecasting market
growth
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- Encouraged by prospects here and abroad
- 2008 U.S. college and university market will grow about 4% to 5%
- Opportunity to gain market share
- Growing enrollments in U.S. and abroad
- U.S. expected to grow 1% to 2% annually for several years
- Mexico 3%, South America 5%
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- Digital products and services provide flexibility for students to study
anytime, anywhere
- Online courses
- Homework management
- Assessment solutions
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- McGraw-Hill Higher Education
[video clip]
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- Adding new verticals to successful AccessMedicine series
- Expanding point-of-care tools for physicians
- Will introduce new 17th Edition of Harrison’s Principles of
Internal Medicine
- Best-selling medical textbook in the world
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- Convergence of content and technology creates new growth opportunities
- Strong state new adoption market in 2008, but concern about growth in
open territory
- 4% to 5% growth for U.S. college and university market in 2008
- Solid prospects overseas
- Increased investments for technology
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- Expanding digital offerings
- Developing interactive products, communities, and tools
- Redefining value proposition for advertisers
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- Information & Media
[video clip]
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- Expect some pickup in 2008
- Our television stations do well in presidential election years
- Three key elections in California
- Colorado regarded a swing state
- Online ad revenue will continue to grow
- Print advertising will stabilize
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- A segment in transition
- Growth in premium services
- A pick up in advertising
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- Still expect to produce double-digit EPS growth in 2007 with improved
operating margins in Education and Financial Services
- Guidance excludes:
- $0.04 charge for elimination of restoration stock option program in 1Q
2006
- $0.06 charge for restructuring in second half of 2006
- $0.03 gain from divestiture of mutual fund data business at Financial
Services in 1Q 2007
- On a GAAP basis, inclusive of these items, the 2007 earnings growth
would be even stronger
- Management believes the non-GAAP financial measures provide more useful
information to investors due to the unusual nature of the excluded
items
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- 4Q 2007: Still expect that the Corporation’s revenues and earnings will
not match last year’s results as the situation continues to deteriorate
- Reflects high single-digit decline in revenue and some margin
contraction in Financial Services
- And decline in operating profit and some margin contraction at
McGraw-Hill Education
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- Currently developing budgets
- Examining cost structure more stringently than ever
- Will look for new opportunities to streamline operations
- Improving cost structure including more printing, composition,
pre-press, and digital educational products off shore
- 25% to 30% cost savings by printing books and ancillary products off
shore
- About $100 million of prepublication costs can potentially be done off
shore at savings of about $0.50 on the dollar
- We will step up efforts
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- On October 24th, Board of Directors authorized the repurchase
of up to 35 million shares remaining in 2007 plan
- 4Q 2007: We have been in the market
- First nine months of 2007: Repurchased 30 million shares
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- Corporation borrowed $1.2 billion in unsecured Senior Notes on October
30, 2007
- We have been paying down outstanding commercial paper borrowings
- Stock buybacks remain important strategy
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