S&p Global Inc. · NYSE:SPGI
S&p Global — The McGraw-Hill Companies — Q2 2009 Earnings Presentation
46 slides from S&p Global's earnings presentation, Jul 28, 2009
Slide 1: 2Q 2009 Earnings Call
2Q 2009 Earnings Call July 28, 2009 Presenters: Harold McGraw III Chairman, President and CEO Robert J. Bahash Executive Vice President and CFO Donald S. Rubin Senior Vice President, Investor Relations Donald S. Rubin Senior Vice President, Investor Relations The McGraw-Hill Companies
Slide 2: Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
“Safe Harbor” Statement Under The Private Securities Litigation Reform Act of 1995 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 capita
Slide 3: MHP 2Q 2009 results
MHP 2Q 2009 results EPS • 2Q 2009: $0.52 – Includes $0.06 for a net restructuring charge and a loss on a divestiture Revenue • 2Q 2009: Declined 12.4% to $1.5 billion compared to 2Q 2008 4 Signs of economic improvement States’ budget pressures persist • Still see challenges in school market Encourag
Slide 4: Signs of economic improvement
2Q: Took steps to prepare for future $0.03 restructuring charge for workforce reduction of approximately 550 positions • Key step: Combining supplemental and basal operations and reduction of approximately 340 positions at McGraw-Hill Education Sold Vista Research • Resulted in pre-tax loss of $13.8
Slide 5: McGraw-Hill Education: Tale of two markets
McGraw-Hill Education: Tale of two markets 2009: • Declining sales in elementary-high school market • Sustained growth in the U.S. college and university market Both trends were evident in 2Q performance • Will also be factors in our second half 2009 results 8 2Q 2009 segment results at McGraw-Hill
Slide 6: Outlook for 2009 state new adoption market
Challenges in elementary-high school market State budgets for education are under pressure Substantial cut backs in historic buying levels in adoption states Reducing estimate for the 2009 state new adoption market to $500 million–$550 million range • Had been forecasting $550 million to $600 millio
Slide 7: Mixed outlook for testing market
Mixed outlook for testing market Acuity continues to win new adoptions and renewals • Our online formative assessment program Gains in formative market offset by declines in custom and off-the-shelf products 12 A strong start in U.S. college and university market Improving revenue outlook in higher
Slide 8: Gauging the impact of a declining el-hi market in 2009
Gauging the impact of a declining el-hi market in 2009 Reducing 2009 revenue guidance for the McGraw-Hill Education segment • Now expect revenue to decline 8.5% to 9.5% • Previously forecasted a 7% to 8% decrease 14 Why we expect outlook for education to improve in 2010 Comparisons will get easier B
Slide 9: Why we expect outlook for education to improve in 2010
Why we expect outlook for education to improve in 2010 Comparisons will get easier next year • School Education Group’s revenue is off 20.1% for first half 2009 • Expect rate of decline to diminish in second half • Easier comparisons in 2010 16 Why we expect outlook for education to improve in 2010
Slide 10: Why we expect outlook for education to improve in 2010
Why we expect outlook for education to improve in 2010 Lowering development costs and reducing time-to-market will improve operating effectiveness and revenue potential • Increasing focus on growth areas such as intervention and college and career readiness • Streamlining product creation in four le
Slide 11: Why we expect outlook for education to improve in 2010
Why we expect outlook for education to improve in 2010 New Center for Digital Innovation to create same digital environment in classrooms that is emerging outside school CINCH Mathematics delivers an Acuity UnWired permits all-digital curriculum that combines students to use wireless online capabili
Slide 12: Why we expect outlook for education to improve in 2010
Why we expect outlook for education to improve in 2010 We expect a solid list of stimulus-funded adoptions in 3Q and 4Q Administration’s focus on real-time assessments and multiple measures will provide new opportunities for Acuity Stimulus package will have greater impact on el-hi market in 2010 th
Slide 13: Why we expect outlook for education to improve in 2010
Why we expect outlook for education to improve in 2010 Pre-K–16 enrollments are growing, according to National Center for Education Statistics • 56.4 million el-hi students in 2010 • 18.6 million students in U.S. higher education 24 2009 outlook for McGraw-Hill Education Before the benefits of the f
Slide 14: Financial Services 2Q 2009 results
McGraw-Hill Education Financial Services Information & Media 2Q 2009 results at Financial Services Revenue (8.4%) to $673.8 million • S&P Credit Market Services: (9.9%) to $457.4 million • S&P Investment Services: (4.9%) to $216.4 million Operating Profit (8.8%) to $276.4 million • Includes pre-tax
Slide 15: Key takeaways from Financial Services' 2Q 2009 results
Key takeaways from Financial Services’ 2Q 2009 results Comparisons especially challenging • 2Q 2008 was biggest revenue and profit producer for the segment last year Signs of a thaw in credit markets • Banks’ increased activity to issue debt without government guarantees –1Q: Guaranteed debt was mor
Slide 16: Signs of a thaw in credit markets
Signs of a thaw in credit markets Greater willingness of investors to take on some risk • Trend contributed to 82.6% increase in U.S. speculative-grade issuance in 2Q 2009 –Issuance was used to refinance bonds and loans • Significant need remains for speculative- grade companies to raise cash, espec
Slide 17: 2Q new dollar volume issuance
2Q new dollar volume issuance Structured finance market declined in U.S. and in Europe Significant impact of corporate activity on S&P Credit Market Services’ transaction revenue • Up compared to 1Q 2009, but down year- over-year –31.6% increase compared to 1Q 2009 –21.6% decrease compared to 2Q 200
Slide 18: Outlook for asset-backed securities market
Outlook for asset-backed securities market TALF (Term Asset-Backed Securities Loan Facility) stimulated new activity in U.S. ABS market • 2Q 2009: New issuance declined 25.8% year-over-year • Substantial tightening of spreads since beginning of 2009 in three consumer asset classes: – Autos – Credit
Slide 19: Easier comparisons in second half vs. 2008
Easier comparisons in second half vs. 2008 24 U.S. RMBS $22.3 12 U.S. CMBS $10.3 (in billions of US$) (in billions of US$) 18 9 $12.5 12 $5.7 $9.8 6 $8.3 $8.1 6 3 $2.6 $1.3 $0.0 $0.0 $0.0 0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 96 U.S. ABS 16 U.S. CDOs $87.6 $13.6 (in billions of US$) (in billions of US$) 72 $6
Slide 20: Improving our forecast for 2009 transaction revenue
Improving our forecast for 2009 transaction revenue Now expect mid single-digit decline in transaction revenue for 2009 • Compares to previous forecast of a 10% to 12% decline 38 Outlook for non-transaction revenue Non-transaction revenue off 3.1% in 2Q 2009 • Reduction in fees earned for work on ca
Slide 21: Outlook for S&P Credit Market Services' revenue
Outlook for S&P Credit Market Services’ revenue International revenue declined in 2Q 2009 by $24.0 million • Foreign exchange rates account for $21.0 million of the decrease but will be less of a factor in 2H 2009 FY 2009: We continue to expect low single- digit revenue decline in S&P CMS’ revenue 4
Slide 22: Outlook for index services
Outlook for index services Index services declined in 2Q, primarily driven by: • Reduction in asset-based fees from exchange-traded funds • Drop in over-the-counter derivative trades linked to various S&P indices Assets under management in exchange- traded funds fell by 8.0% to $189.8 billion versus
Slide 23: Data and information benefiting Investment Services
Data and information benefiting Investment Services Capital IQ added customers in 2Q • Now serves over 2,800 clients • An increase of 5.2% since end of 2008 Expanded overseas and benefited from international growth in second quarter 44 The regulatory outlook: Creating a global framework Ongoing dial
Slide 24: S&P's initiatives complement proposed new regulations
S&P’s initiatives complement proposed new regulations Focused on four key areas: • Quality • Prevention of conflicts • Increased transparency • Accountability 46 S&P’s global outreach S&P’s commitment to reform • Addresses changes S&P has made in its businesses in the last two years • Appeared in Fi
Slide 25: Timeline on new regulatory framework remains fluid
Timeline on new regulatory framework remains fluid U.S. legislative process may be completed by end of 2009 • Depending on congressional priorities, could finish in 2010 Europe: Expect new European Union legislation on credit rating agencies to be formally adopted this fall • Effective date for rati
Slide 26: Accountability: The marketplace, the SEC, and private litigation
Accountability: The marketplace, the SEC, and private litigation Daily accountability is most important check on our ratings business Accountable to SEC and subject to private litigation • S&P can be sued for securities fraud, like all other participants in the financial markets • Courts have recogn
Slide 27: Latest developments on litigation front
Latest developments on litigation front New CALPERS lawsuit: • Purchased without due diligence $1.3 billion of securities based solely on ratings opinions issued by S&P, Moody’s and Fitch • S&P’s clear and long standing public disclosure: A rating is not a recommendation to buy, sell, or hold We thi
Slide 28: Information & Media: 2Q 2009 results
McGraw-Hill Education Financial Services Information & Media Information & Media: 2Q 2009 results Continuing weakness in the advertising market a key factor in 2Q 55
Slide 29: 2Q 2009 segment results at Information & Media
2Q 2009 segment results at Information & Media Revenue (11.5%) to $236.2 million • Broadcasting Group: (23.1%) to $20.4 million • Business-to-Business Group: (10.2%) to $215.8 million Operating Profit (41.8%) to $14.4 million • Includes a net pre-tax restructuring charge of $4.0 million Operating Ma
Slide 30: Factors influencing 2Q results
Factors influencing 2Q results Platts: Volatility contributes to strong performance • Oil prices have more than doubled since hitting low of $33.98 a barrel in February Platts is growing in the petroleum, natural gas, nuclear and metals markets 58 Outlook for 2009: Information & Media Summary: • Rev
Slide 31: Outlook for 2009: Information & Media
Outlook for 2009: The McGraw-Hill Companies Summary: • Revenue to decline 5.5% to 6.5% versus previous guidance of 4% to 5% decrease • Excluding second quarter restructuring charge and divestiture of Vista, earnings per share of $2.20 to $2.25, although it appears we will come in at low end of range
Slide 32: Outlook for 2009: The McGraw-Hill Companies
Second half is key to 2009 performance Factors influencing second half results • Seasonality of education business –3Q is biggest earnings contributor each year • Expect revenue’s rate of decline to diminish –Off 9.6% in first half • Minimal growth in expenses –Down 7.1% in first half –For full year
Slide 33: Second half is key to 2009 performance
Realizing the benefits of restructuring 2Q restructuring charge of $24.3 million relating to reduction of approximately 550 positions • Partially offset by reversal of $9.1 million related to prior restructuring initiatives, for a net charge of $15.2 million pre-tax, or approximately $0.03 per dilut
Slide 34: Realizing the benefits of restructuring
Foreign exchange rates: A factor all year Reduced revenue significantly in first half • 2Q: Reduced revenue by $37.2 million, or 220 basis points • 1H: Reduced revenue by $74.6 million, or 260 basis points Based on current rates, we anticipate less impact on revenue in 2H 2009 66 Measuring impact of
Slide 35: Foreign exchange rates: A factor all year
Measuring impact of foreign exchange on operating profit Benefited operating profit by $7.3 million in 1H 2009 Why different top and bottom line outcomes • Revenue: Billings are primarily in Euros and U.S. dollars • Costs: Significant expenses are denominated in non-U.S. dollars 68 Measuring the imp
Slide 36: Measuring the impact of incentive compensation
Benefits of cost containment at McGraw-Hill Education 2009 outlook for McGraw-Hill Education • Revenue: Now expected to decline 8.5% to 9.5% versus previous guidance of a 7% to 8% decrease • Expenses: Anticipate a mid single-digit decline versus previous estimate of a low single-digit decline • Main
Slide 37: Benefits of cost containment at McGraw-Hill Education
2009 outlook for Financial Services S&P Credit Market Services transaction revenue • 1H 2009: Down 20% • 2H 2009: Expect strong growth as comparisons get easier due to depressed issuance in 2008 S&P Credit Market Services non-transaction revenue • 1Q 2009: $280 million • 2Q 2009: $311 million • Reas
Slide 38: 2009 outlook for Financial Services
Benefits of cost containment at Financial Services 2Q 2009: Expenses down 8.0% excluding restructuring charges in 2008 and 2009 and the loss on the divestiture of Vista Research • In constant currency, 2Q expenses down $15.2 million, or 3.6% – Decrease primarily driven by reduced incentive compensat
Slide 39: Benefits of cost containment at Financial Services
2009 outlook for Information & Media Lowering guidance for operating margin • Additional revenue decline partially mitigated by continued cost containment initiatives • Forecasting a 300 to 400 basis point decline versus earlier guidance of a 200 to 300 basis point decline, excluding 2008 and 2009 r
Slide 40: 2009 outlook for Information & Media
Changes in the effective tax rate for 2009 2Q 2009: 36.4% versus 37.0% in 2Q 2008 2009: Expect the full-year tax rate to be 36.4% • An approximate 60 basis point decline from 2008 78 2009 guidance for free cash flow Pension contribution of about $25 million is planned in 3Q 2009 • Incorporated into
Slide 41: Changes in the effective tax rate for 2009
2009 guidance for free cash flow 1H 2009: Free cash flow improved by $337 million versus 1H 2008, driven by: • Significant reduction in incentive compensation payments • Continuing working capital improvements, particularly for inventories and accounts receivable 2H 2009: More difficult comparisons
Slide 42: 2009 guidance for free cash flow
Diluted weighted average shares outstanding (WASO) 2Q 2009: 313.0 million shares • 8.1 million share decrease compared to 2Q 2008 – Primarily due to 2008 share repurchases and to lesser extent, decline in our stock price • Roughly flat compared to 1Q 2009 Fully-diluted shares at end of 2Q 2009: Appr
Slide 43: Diluted weighted average shares outstanding (WASO)
Outlook for prepublication investments in 2009 2Q 2009: $42.3 million, down $22.9 million compared to 2Q 2008 2009: Now expect approximately $200 million, down from previous guidance of $225 million and $254 million invested in 2008 • Factors for lower level: – Reducing scope of some programs in cur
Slide 44: Outlook for prepublication investments in 2009
Outlook for non-cash items Amortization of prepublication costs • 2Q 2009: $71 million, compared to $66 million in same period last year • 2009: Continue to expect a range of $275 million to $280 million –Compares to $270 million in 2008 86 Outlook for non-cash items Depreciation • 2Q 2009: $28.8 mi
Slide 45: Outlook for non-cash items
Outlook for non-cash items Amortization of intangibles • 2Q 2009: $11.4 million, compared to $13.1 million for same period last year • 2009: Now expect approximately $50 million, versus previous estimate of $55 million 88 Outlook for unearned revenue in 2009 End of 2Q 2009: $1.1 billion • Roughly fl
Slide 46: Outlook for non-cash items
2Q 2009 Earnings Call July 28, 2009 Presenters: Harold McGraw III Chairman, President and CEO Robert J. Bahash Executive Vice President and CFO Donald S. Rubin Senior Vice President, Investor Relations NOTE: The presenters’ slides and a replay of this webcast will be available from www.mcgraw-hill.c
The McGraw-Hill Companies — Q2 2009 Earnings Presentation on 6ix