S&p Global Inc. · NYSE:SPGI
S&p Global — The McGraw-Hill Companies — Q3 2010 Earnings Presentation
49 slides from S&p Global's earnings presentation, Oct 26, 2010
Slide 1: 3Q 2010 Earnings Call
3Q 2010 Earnings Call October 26, 2010 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 our businesses and our prospects, new products, sales, expenses, tax rates, cash flows, prepublication investments and operating and capital requirem
Slide 3: MHP 3Q 2010 results
MHP 3Q 2010 results 15% increase in 3Q EPS • 3Q 2010: $1.23 (includes $0.02 for gain on divestitures and $0.01 dilution for acquisition of TheMarkets.com) 5.5% increase in 3Q revenue: $1.98 billion • Grew 6.8% excluding divestiture of BusinessWeek 4 Increasing EPS guidance for 2010 Now anticipate EP
Slide 4: 3Q 2010 results at Financial Services
Financial Services McGraw-Hill Education Information & Media 3Q 2010 results at Financial Services S&P Credit Market Services’ 3Q revenue increased 11.1% • Domestic revenue grew 20.9% • International revenue grew 0.9% S&P Investment Services’ revenue grew by 6.3% 7
Slide 5: 3Q 2010 results at Financial Services
3Q 2010 results at Financial Services Revenue +9.5% to $697.4 million • S&P Credit Market Services: +11.1% to $473.2 million • S&P Investment Services: +6.3% to $224.2 million Operating Profit +6.6% to $273.1 million • Includes $7.3 million pre-tax gain on divestitures Operating Margin 39.2% • Incre
Slide 6: Interest rate spreads: A key factor in issuance levels
Interest rate spreads: A key factor in issuance levels Speculative-grade spreads began tightening in September; trend continued into October Basis January 5 year Points 10/21/10 9/30/10 9/1/10 2010 Mvg Avg Speculative- grade 616 641 675 616 579 composite spread Source: Standard & Poor’s Global Fixed
Slide 7: Refinancing: More than 2/3rds of U.S. high-yield volume in 2010
Refinancing: More than 2/3rds of U.S. high-yield volume in 2010 U.S. Issuance Bond Volume 3Q ’10 YTD M&A Non-LBO 9.6% 11.6% DIP 0.0% 0.0% Corp Purpose 11.1% 10.0% Exit Financing 0.6% 1.9% LBO 4.9% 4.0% Other 0.0% 0.1% Proj Financing 0.0% 0.1% Recap 0.7% 0.3% Dividend 4.8% 3.9% Refinancing 68.4% 68.1
Slide 8: Outlook for global bank loan market
Outlook for global bank loan market 3Q: Global bank loan ratings soared • Absolute volume still on the low end of historical averages Fundamentals remain strong Liquidity is good in U.S.; only slightly less in Europe 14 Municipal market: Usual seasonal slow down in summer months Public finance dolla
Slide 9: Structured finance market struggling to recover
Structured finance market struggling to recover Residential mortgage-backed securities market can’t compete with spreads on structured vehicles that benefit from government support • Fannie Mae • Freddie Mac • Ginnie Mae 16 Tracking 2010 new issuance: U.S. structured finance through September U.S. R
Slide 10: Favorable trends in the asset-backed market
Favorable trends in the asset-backed market Steady spread contraction across all asset-backed securities Asset-backed January 2010 October 2010 securities Prime autos LIBOR + 55 bps LIBOR + 22 bps Credit cards LIBOR + 80 bps LIBOR + 22 bps FFELP student loans LIBOR + 50 bps LIBOR + 30 bps Source: J.
Slide 11: Outlook for corporates: 4Q new issuance off to solid start
Outlook for corporates: 4Q new issuance off to solid start High-yield issuers finding a receptive market Investment-grade issuers taking advantage of attractive funding rates Leveraged loans will continue to fill the institutional pipeline • Favorable rates and heavy demand should continue to fuel t
Slide 12: S&P Investment Services: New record for ETFs
S&P Investment Services: New record for ETFs $260.4 billion in assets under management based on S&P indices at end of September • 17.9% year-over-year increase • 12.9% sequential increase over 2Q 2010 – Growth in SPDR and iShares in ETFs were major contributors Assets Under Management Based on S&P I
Slide 13: Finding new ways to grow S&P Indices
Finding new ways to grow S&P Indices S&P will be introducing new indices in various asset classes: • Commodities • Fixed income • Equities 24 Historic first for S&P Indices in 3Q Licensed Options Clearing Corporation to handle trades of over-the-counter S&P index- based option contracts and receive
Slide 14: Capital IQ continues to expand in global markets
Capital IQ continues to expand in global markets Acquired TheMarkets.com’s research and estimates business in September • Positions Capital IQ for significant growth on the buy side • Modest overlap between TheMarkets.com’s 2,000 clients and Capital IQ’s 3,300 clients Capital IQ expects to: • Add cl
Slide 15: What Capital IQ and TheMarkets.com now offer investors
What Capital IQ and TheMarkets.com now offer investors Content Sell Side Sell Side Fixed Research Analyst Income Models Research Buy Side Capital IQ Client Segment CIQ + The Markets.com Private Equity Capital IQ Venture Capital CIQ + The Markets.com Corporate IR Dept, Capital IQ Business CIQ + The D
Slide 16: Gaining more clarity on regulatory and legal issues
Gaining more clarity on regulatory and legal issues SEC rule-making will be required to implement many of the new Dodd-Frank Act’s provisions • S&P continues to engage with SEC and market participants as part of rule-making process 30 How S&P has invested to meet regulatory commitments S&P created Q
Slide 17: The costs of creating a framework to deal with regulations
The costs of creating a framework to deal with regulations S&P spending for QCCR-related items: • 2009: $63 million • 2010: Expect spending to increase by about $15 million • 2011: On a preliminary basis, expect spending to increase in the $12 million to $15 million range Price increases have helped
Slide 18: Latest developments on litigation front
Latest developments on litigation front Our assessment of legal risk facing the Corporation is unchanged • 15 cases have been dismissed outright • Five cases have been withdrawn 34 Latest developments on litigation front Favorable ruling in case of Rice versus S&P and Moody’s on October 22, 2010 • F
Slide 19: Latest developments on litigation front
Latest developments on litigation front The court on a negligent misrepresentation claim concerning a professional opinion: [It can be stated by] “a narrow and circumscribed group of persons to whom or for whom the misrepresentations were made…The rationale for limiting liability to a specific group
Slide 20: 2010 outlook for Financial Services
2010 outlook for Financial Services Summary • Revenue growth: Expect mid single-digits • Operating margin: Now expect 150 basis-point decline, primarily due to acquisition of TheMarkets.com –Previously expected 100 basis-point decline 38 Financial Services McGraw-Hill Education Information & Media
Slide 21: 3Q 2010 segment results at McGraw-Hill Education
3Q 2010 segment results at McGraw-Hill Education Revenue +5.5% to $1.1 billion • School Education Group: +6.7% to $534.7 million • Higher Education, Professional and International Group: +4.3% to $520.0 million Operating Profit +19.9% to $357.5 million • Includes $3.8 million pre-tax gain on divesti
Slide 22: Overall el-hi market up 8.0% through August 2010
Overall el-hi market up 8.0% through August 2010 Total Basal and Supplemental K–12 Net Sales $1,000 $800 (in millions) 2009 $600 2010 $400 $200 $0 Jan Fe b M ar Apr M ay Jun Jul Aug 2009 $69.7 $81.7 $141.2 $162.1 $266.3 $551.1 $700.7 $662.0 2010 $94.6 $102.3 $123.8 $164.2 $267.3 $766.0 $729.9 $629.6
Slide 23: Outlook for September and 2010
Outlook for September and 2010 Early indications that adoption market slowed in September • Even if industry sales remain flat in the last four months of 2010, the el-hi market could reach high end of 4% to 6% growth forecast for 2010 McGraw-Hill had strong sales in September, especially in the adop
Slide 24: Seizing the opportunities in adoption states
Seizing the opportunities in adoption states Overall capture rate in K–12 math adoptions will be about 28% • School Group expects to win more than 40% of secondary school market with programs in Florida, California, Indiana, West Virginia, and Oklahoma • Underperformance in Florida’s K-5 math adopti
Slide 25: A seasonally slow period for the testing market
A seasonally slow period for the testing market 3Q is normally slow in testing market 2010 has additional impact of planned phase out of statewide custom contracts in Florida, Arizona and California Procedural delays in signing some important contracts were a factor in the quarter • Issues will be s
Slide 26: Growing digital opportunities in higher education
Growing digital opportunities in higher education All our major higher education product lines produced year-over-year growth in the critical 3Q • Added impetus from double-digit growth of digital products and services Our lineup of homework management, assessment and tutoring products is gaining tr
Slide 27: A new search engine for customizing content
A new search engine for customizing content Newly launched McGraw-Hill Create provides: • A Google-like search engine that enables instructors to customize quality content for courses – Can draw on 4,000 textbooks; 5,500 articles; 11,000 literature, philosophy, and humanities readings; and 25,000 bu
Slide 28: What happens when a digital model replaces the legacy model
What happens when a digital model replaces the legacy model Connecting content and managing digital assets globally—a powerful combination With McGraw-Hill Create, we are not supplying physical products, which means: • No printing and binding costs • No inventory or warehousing costs • No shipping c
Slide 29: Outlook for higher education
Outlook for higher education 4Q 2010 will be challenging, even with rapid growth of digital products and services • We had significant upswing in operating profits in 2009 based on: –Surge in second semester orders in the U.S. higher education market –Improved results in professional and internation
Slide 30: 2010 outlook for McGraw-Hill Education
2010 outlook for McGraw-Hill Education Revenue: Still expect low single-digit increase Improved operating margin forecast: Now expect improvement of 200 basis points to 14% • Previously forecasted flat margins 58 Financial Services McGraw-Hill Education Information & Media
Slide 31: 3Q 2010 results at Information & Media
3Q 2010 results at Information & Media Revenue (4.7%) to $227.8 million • +5.1% excluding divestiture of BusinessWeek • Business-to-Business Group: (7.1%) to $204.1 million +3.3% excluding BusinessWeek • Broadcasting Group: +23.5% to $23.6 million Operating Profit Increased 55.1%, or $16.3 million,
Slide 32: Platts: Expanding coverage, new price assessments
Platts: Expanding coverage, new price assessments Continuing to expand coverage of refined petroleum markets in U.S., Europe, and Asia Creating new price assessments in gasoline, fuel oil, and naphtha, a raw material for gasoline Expanded suite of daily spot price assessments to include alumina, a m
Slide 33: Broadcasting: Improvement in 3Q results
Broadcasting: Improvement in 3Q results 3Q: Revenue increased 23.5% to $23.6 million • Improved national and local time sales • Increase in political advertising –Attracting significant ad dollars in Colorado for the contest for governor, a heated race for a Senate seat, and issue-related advertisin
Slide 34: Outlook for 2010: The McGraw-Hill Companies
Outlook for 2010: The McGraw-Hill Companies Improved EPS guidance: Now expect earnings per diluted share guidance in the $2.60 to $2.65 range • Expect to achieve high end of range • New guidance excludes $0.02 of one-time gains from divestitures, but includes dilution of $0.02 from acquisitions 66 R
Slide 35: The cost of recent acquisitions
The cost of recent acquisitions Expect to spend approximately $360 million on acquisitions and a recent equity investment • TheMarkets.com’s research and estimates business for Capital IQ – 2010: Dilution of $0.01 in 3Q and $0.01 in 4Q – 2011: Expected to be accounting and cash flow accretive – Expe
Slide 36: Share repurchase: Back in the market
Accounting for 3Q divestitures McGraw-Hill Education • 3Q divestiture generated a $3.8 million pre-tax gain CRISIL divestitures generated $7.3 million in pre-tax gains • Since CRISIL is a non-wholly owned subsidiary, part of the gain is deducted for purposes of calculating EPS • $2.3 million represe
Slide 37: From net debt to a net cash position in 3Q
Update on diluted weighted average shares outstanding (WASO) 3Q 2010: 309.3 million shares 4.4 million share decline compared to 3Q 2009 • Primarily due to full impact of 2Q 2010 share repurchases 3.9 million share decline from 2Q • Reflects full impact of 2Q share repurchases and weighted impact of
Slide 38: Outlook for free cash flow in 2010
Outlook for free cash flow in 2010 3Q 2010: $552 million YTD 2010: $651 million versus $507 million for same period last year • $144 million increase from prior year – Primarily due to stronger operating results and a continuing focus on asset management 2010: Now expect free cash flow in excess of
Slide 39: 3Q expense savings at McGraw-Hill Education
3Q expense savings at McGraw-Hill Education 3Q 2010: Adjusted expenses roughly flat, declining 0.1% YTD 2010: Adjusted expenses declined 1.3% Benefited from: • Merging of publishing operations in 2009 • Reduced expenses due to planned phase out of statewide, low- margin custom contracts in Californi
Slide 40: 3Q expenses at Financial Services
3Q expenses at Financial Services 3Q 2010: Adjusted expenses increased 13.3% • Increased 12.8%, at constant currencies YTD 2010: Adjusted expenses increased 10.1% • Increased 9.3%, at constant currencies 3Q and YTD increases driven by increased salaries and occupancy costs, primarily due to internat
Slide 41: How stock-based compensation affected Financial Services
How stock-based compensation affected Financial Services 2010: Due to stronger operating results, we now expect an approximate $40 million increase in MHP’s stock-based compensation • Previously expected a $30 million increase versus 2009, due to the three-year earning and vesting period, which is o
Slide 42: 3Q expense savings at Information & Media
3Q expense savings at Information & Media 3Q 2010: Adjusted expenses declined 13.1% YTD 2010: Adjusted expenses declined 17.4% Factors influencing decline: • 3Q 2010: Divestiture of BusinessWeek reduced 3Q revenue by $22 million and expenses by $32 million, for a positive profit impact of approximat
Slide 43: 2010 outlook for corporate expenses
2010 outlook for corporate expenses 3Q 2010: $44.4 million • $16.5 million increase compared to 3Q 2009 – Primarily driven by increased incentive compensation compared to lower levels in 2009 and normal increases due to stronger operating results, as well as increased excess vacant space 84 2010 out
Slide 44: Outlook for net interest expense
Outlook for net interest expense 3Q 2010: $19.3 million • Compared to $17.8 million in 3Q 2009 and $20.8 million in 2Q 2010 2010: Expect full-year interest expense to be roughly comparable to 2009, which was $76.9 million 86 Outlook for effective tax rate 3Q 2010 and YTD: 36.4% • Unchanged from 2009
Slide 45: Reduction in 2010 prepublication investments
Reduction in 2010 prepublication investments 3Q 2010: $39.3 million • $5.4 million decrease versus 3Q 2009 YTD 2010: $99.3 million • $30.4 million decrease versus prior year 88 Outlook for prepublication investments 2010: We now expect approximately $160 million • Previous estimate of $195 million t
Slide 46: Outlook for property and equipment expenditures
Outlook for property and equipment expenditures 3Q 2010: $16.6 million • $1 million higher than 3Q 2009 YTD 2010: $38.6 million 2010: Now expect $70 million to $80 million • Previous estimate of $90 million to $100 million • Full year compares to $68.5 million in 2009 90 Outlook for non-cash items:
Slide 47: Outlook for non-cash items: Depreciation
Outlook for non-cash items: Depreciation 3Q 2010: $24.8 million • Compared to $26.0 million in 3Q 2009 2010: Now expect to be slightly below last year, which was $113 million 92 Outlook for non-cash items: Amortization of intangibles 3Q 2010: $9 million YTD 2010: $32 million 2010: Now expect to be c
Slide 48: Outlook for unearned revenue in 2010
Outlook for unearned revenue in 2010 3Q 2010: $1.1 billion • 4.2% increase compared to 3Q 2009 • Increased approximately 5%, at constant foreign currency exchange rates and excluding impact of acquisitions and divestitures, compared to 3Q 2009 94 Outlook for unearned revenue in 2010 Financial Servic
Slide 49: 3Q 2010 Earnings Call
3Q 2010 Earnings Call October 26, 2010 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: A replay of this webcast will be available approximately two hours after the end of the c
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