S&p Global Inc. · NYSE:SPGI
S&p Global — The McGraw-Hill Companies — Q3 2008 Earnings Presentation
48 slides from S&p Global's earnings presentation, Oct 28, 2008
Slide 1: 3Q 2008 Earnings Call
3Q 2008 Earnings Call October 28, 2008 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 3Q 2008 results
MHP 3Q 2008 results EPS • 3Q 2008: $1.23 – Includes pre-tax restructuring charge of $23.4 million, or $0.05 per diluted share, for a workforce reduction of approximately 270 positions Revenue • 3Q 2008: Declined 6.4% to $2.0 billion 4 Measuring restructuring actions since end of 2007 2Q and 3Q restr
Slide 4: New efforts to restore confidence in credit markets
New efforts to restore confidence in credit markets More support by U.S. government for financial sector and to restore confidence in credit markets • U.S. Treasury Secretary Paulson provided details on bank recapitalization measures • Fed Chairman Bernanke is supporting another stimulus package Mor
Slide 5: Updating guidance for 2008
Updating guidance for 2008 Now forecasting 2008 EPS of $2.63 to $2.65 • Excludes restructuring charges, but includes the associated benefits • Forecast assumes 4Q EPS of $0.40 to $0.42 8 McGraw-Hill Education Financial Services Information & Media
Slide 6: 3Q results at McGraw-Hill Education
3Q results at McGraw-Hill Education Revenue Segment declined 3.8% to $1.1 billion • School Education Group declined 9.1% to $623.5 million • Higher Education, Professional and International Group increased 3.7% to $507.8 million Operating Profit Decreased 14.5% to $351.5 million • Includes $5.4 mill
Slide 7: The changing outlook for the el-hi market
The changing outlook for the el-hi market Industry sales up 3.9% through July, according to AAP Market started slipping in August • 16.6% decline in August • 17.6% decline in September • Industry sales down 3.3% though September We expect el-hi market to decline about 3% to 4% in 2008 We expect to g
Slide 8: Decline in new textbook sales
Decline in new textbook sales Decrease was most pronounced in open territory states • More dependent on local property tax revenues • These states are mainly in northern and central regions which face higher fuel costs for bus transportation and heating 14 Pressures on state education budgets School
Slide 9: How school districts are reducing costs
How school districts are reducing costs Buying newly-adopted programs for a few grades • Will add more grades in the future Buying classroom set and having classes reuse books versus one book per student More photocopying of workbooks 16 Why short-term cost saving measures are not sustainable Growin
Slide 10: Delivering on the forecast for state new adoption sales
Delivering on the forecast for state new adoption sales Captured approximately 31% of total available dollars in state new adoption market • Florida K–5 reading: Expect to capture more than 70% • K–12 reading/literature: Expect to take about 40% • Texas K–5 math: Project a 31% capture rate • Califor
Slide 11: In U.S. college market: Shift in ordering pattern
In U.S. college market: Shift in ordering pattern Peak ordering normally occurs in July and August • In 2008, surge in September as bookstores waited to gauge student demand Still expect total market to grow 4% to 6% this year • Our higher education group will underperform industry 20 How 3Q shaped
Slide 12: How 3Q shaped up for U.S. Higher Education
How 3Q shaped up for U.S. Higher Education Digital products grew rapidly • Study guide products like Homework Manager led the way –Students embracing generation of products that provide course-critical content that helps them study and prepare for exams more efficiently 22 Making headway with eBooks
Slide 13: Digital products growing in professional markets
Digital products growing in professional markets Digital subscriptions and licensing had favorable impact Could not offset softness at retail as bookstores cut back on orders and reduced inventory in face of economic conditions 24 3Q success in international markets Professional • Recently released
Slide 14: Outlook for McGraw-Hill Education
3Q results for McGraw-Hill Education Summary • Growth in higher education markets here and abroad in 3Q • Digital revenue continued to grow rapidly in higher education and professional markets • Strong performance in state new adoption market with 31% capture rate 26 Outlook for McGraw-Hill Educatio
Slide 15: 3Q results at Financial Services
McGraw-Hill Education Financial Services Information & Media 3Q results at Financial Services Revenue Segment declined 14.2% to $651.5 million • S&P Credit Market Services declined 24.2% to $423.2 million • S&P Investment Services increased 13.5% to $228.2 million Operating Profit Decreased 18.8% to
Slide 16: Turbulence in credit markets has carried into third quarter of 2008
Results through nine months at Financial Services Revenue Segment declined 12.0% to $2.0 billion Operating Profit Decreased 23.3% to $840.9 million Operating Margin 41.4% 2Q and 3Q restructuring charges total $19.3 million for reduction of approximately 290 positions • Reduction of 460 positions inc
Slide 17: Turbulence in credit markets has carried into third quarter of 2008
Turbulence in credit markets has carried into third quarter of 2008 U.S. Corporates U.S. Public Finance 450 200 (in billions of US$) 375.2 (in billions of US$) 375 363.5 323.3 158.6 300 279.0 150 132.8 260.2 242.4 111.5 117.6 225 106.5 104.6 100 89.2 150 82.9 75 50 0 Q1 Q2 Q3 Q4 0 Q1 Q2 Q3 Q4 2007 2
Slide 18: Building a diverse, resilient revenue stream for Financial Services
Building a diverse, resilient revenue stream for Financial Services 3Q 2007 Ratings Revenue 3Q 2008 Ratings Revenue 41% International 48% International 59% 52% U.S. U.S. –Europe: Substantial drop in structured finance issuance resulting from widening spreads and decline in fundamentals –Asia-Pacific
Slide 19: Growth of deferred revenue in 3Q
Growth of deferred revenue in 3Q Up 7.2% to just over $805 million at end of 3Q A sequential decline compared vs. 2Q • Slower growth reflects seasonality of revenue and decline in ratings activity 36 The benefits of a diversified and resilient portfolio S&P Investment Services • Another quarter of d
Slide 20: Data and information benefiting Investment Services
Data and information benefiting Investment Services Capital IQ is adding customers here and abroad • Now serves more than 2,500 clients • Client base: Up 22.2% in past 12 months Capital IQ continues to expand product offering and functionality • Recently acquired copy of Reuters Estimates and Reuter
Slide 21: Continuing to expand index products and services
Continuing to expand index products and services 27% year-over-year increase in average daily volume for exchange-traded derivatives based on S&P indices • Daily volume averaged 3.7 million contracts in 3Q 40 Continuing to expand index products and services New in 2008: • 45 ETFs launched in first n
Slide 22: S&P faces easier comparisons in Q4
Continuing to expand index products and services Additions to family of fixed income indices • October: S&P/LSTA U.S. Leveraged Loan 100 index • October: S&P U.S. Commercial Paper Index Signed agreement with Korean Exchange to develop new set of indices in September • S&P has partnerships with prima
Slide 23: Outlook for structured finance
Outlook for structured finance When investors return, it will be back to basics • Less leverage • Less risk • More plain vanilla securities Outlook for year assumed a low level of activity in structured finance Guidance: • Segment revenue will decrease 11% to 12% • 425 to 475 basis point decline in
Slide 24: Regulatory issues: S&P's standards
Regulatory issues: S&P’s standards Policies and procedures for S&P’s ratings business: • Has strong policies against analysts structuring transactions S&P rates • Does not provide consulting services to issuers • Does not give higher ratings based on how it is paid • Does make its ratings, criteria
Slide 25: What the SEC found
What the SEC found A thorough examination by the SEC found “there is no evidence found that decisions about ratings methodology or models were based on attracting or losing market share” 48 What an S&P rating represents Under the issuer-pays model, S&P makes all its ratings public, free of charge, i
Slide 26: Regulatory issues: S&P's commitment
Regulatory issues: S&P’s commitment S&P recognizes the seriousness of the current dislocation in capital markets and that not all the forecasts used in its ratings analysis have been borne out S&P is committed to: • Constant improvement • Greater transparency • Independence S&P announced 27 actions
Slide 27: The outlook for regulation
The outlook for regulation S&P expects to learn more about regulatory initiatives next month • SEC could issue new rules for rating agencies next month • November 12: European Commission expected to issue its proposals on rating agencies We believe global consistency should be based on IOSCO’s recen
Slide 28: Assessing the legal and regulatory outlook
Assessing the legal and regulatory outlook We continue to believe any pending legal, governmental, or self-regulatory proceedings or investigation will not result in a material adverse effect on our financial condition or results of operations 54 Outlook for Financial Services Summary • Revenue will
Slide 29: 3Q results at Information & Media
McGraw-Hill Education Financial Services Information & Media 3Q results at Information & Media Revenue Segment increased 5.3% to $265.7 million • Business-to-Business Group grew 5.4% to $240.7 million • Broadcasting up 4.4% to $25.0 million Operating Profit Increased 22.6% to $22.8 million • Include
Slide 30: Results through nine months at Information & Media
Results through nine months at Information & Media Revenue Segment up 5.1% to $776 million Operating Profit Increased 37.3% to $59.4 million Operating Margin 7.7% 3Q restructuring charges total $13.9 million for reduction of approximately 140 positions 58 Growth at Business-to-Business Group Platts—
Slide 31: Growth at Business-to-Business Group
Growth at Business-to-Business Group Aviation Week benefited from Farnborough Air Show • Held every other year in third quarter 60 Growth at Business-to-Business Group BusinessWeek’s advertising pages were down 13.9% in 3Q Continues to attract new subscribers and improve its renewal rate Launched Bu
Slide 32: Broadcasting: Benefiting from political advertising
Broadcasting: Benefiting from political advertising Solid increase in political advertising on TV offset softness in local and national advertising in 3Q Our Denver station benefited from: • Colorado status as swing state in presidential election • Advertising by candidates for U.S. Senate and House
Slide 33: Outlook for The McGraw-Hill Companies
Outlook for The McGraw-Hill Companies 2008: Now forecasting EPS of $2.63 to $2.65 • Projection excludes restructuring charges, but includes the associated benefits • Forecast assumes 4Q EPS of $0.40 to $0.42 64 Outlook for The McGraw-Hill Companies Outlook for 2009 • Budgeting process is underway –
Slide 34: Robert J. Bahash
Robert J. Bahash Executive Vice President and Chief Financial Officer The McGraw-Hill Companies Taking a hard look at costs and expenses 4Q 2007: Revenue for S&P Credit Market Services dropped by 14.1% and segment was off by 7.2% 4Q 2008: Easier comparisons, but segment faces challenges Outlook for
Slide 35: Taking a hard look at costs and expenses
Taking a hard look at costs and expenses McGraw-Hill Education • 4Q is seasonally slow • El-hi market: We may realize some sales from postponements, but too hard to call • U.S. college and university: Introducing new titles in 4Q but timing of pick up is difficult to gauge 68 Taking a hard look at c
Slide 36: Taking a hard look at costs and expenses
Taking a hard look at costs and expenses For MHP: $117 million year-over-year decline in incentive compensation • $71 million reduction in long-term, stock- based compensation –Lowered accruals for long-term awards due to reduced operating results –Resulted in negative $39 million for stock- based c
Slide 37: Managing expenses at Financial Services
Managing expenses at Financial Services 3Q Financial Services Expenses 2008 2007 Change (in millions) As Reported $369.8 $413.0 $(43.2) Without Restructuring $365.7 $413.0 $(47.3) Year-over-year expense comparison benefits from $60 million reduction in incentive compensation in 3Q • Up from second q
Slide 38: Managing expenses at McGraw-Hill Education
Managing expenses at McGraw-Hill Education 3Q McGraw-Hill Education Expenses 2008 2007 Change (in millions) As Reported $779.9 $764.9 $15.0 Without Restructuring $774.5 $764.9 $ 9.6 Minimal expense growth driven by: • $14.1 million increase in prepublication amortization • Increased costs related to
Slide 39: Outlook for lower corporate expenses
Outlook for lower corporate expenses 3Q 2008: Decreased $28 million, or 74.3%, to $9.7 million, compared to a year ago • Primarily driven by lower incentive compensation accruals for the quarter • Excluding the reduction in incentive compensation accruals, expenses were approximately flat with prior
Slide 40: MHP's strong financial position
MHP’s strong financial position Outstanding commercial paper is supported by new $1.15 billion credit facility • Commercial paper rating is F-1/P-1 • Given current liquidity issues in market, important to be a Tier 1 issuer for pricing and availability Plan to reduce commercial paper outstanding thr
Slide 41: Outlook for net interest expense
Outlook for net interest expense 3Q 2008: $22 million net interest expense • Compared to $15.4 million in 3Q 2007 2008: Expect approximately $80 million for year • Expect 4Q to be roughly comparable with 3Q 80 2008 outlook for free cash flow 3Q 2008: Approximately $500 million, roughly flat with 200
Slide 42: Investing in fast-growing businesses
Investing in fast-growing businesses First nine months 2008: Approximately $40 million spent on acquisitions October: Enhanced Capital IQ’s data offering • Acquired copy of Reuters Estimates and Reuters Research-on-Demand databases 82 Update on share repurchases 3Q 2008: 3.5 million shares repurchas
Slide 43: Update on share repurchases
Currently evaluating extent of share repurchases in 4Q Remain committed to returning cash to shareholders through dividend payments and share repurchases • Must balance commitment while maintaining appropriate liquidity during difficult credit environment 84 Reduced diluted weighted average shares o
Slide 44: Outlook for unearned revenue
Outlook for unearned revenue 3Q 2008: $1.1 billion • Increased 6.4% year-over-year • Financial Services: Grew 7.2% in 3Q –Year-over-year decline at S&P’s Credit Market Services accounts for slower growth –Segment represents approximately three quarters of McGraw-Hill’s unearned revenue 2008: Expect
Slide 45: Maintaining estimates for 2008 prepublication investments
Maintaining estimates for 2008 prepublication investments 3Q 2008: $65.4 million, compared to $76.9 million in same period last year 2008: Continue to expect $270 million 88 Lowering capital expenditures for property and equipment 3Q 2008: $17.7 million vs. $63.0 million in 3Q 2007 • Higher last yea
Slide 46: Outlook for non-cash items
Outlook for non-cash items Amortization of pre-publication costs • 3Q 2008: $124.6 million, compared to $110.5 million for 3Q 2007 • 2008: Continue to expect $275 million 90 Outlook for non-cash items Depreciation • 3Q 2008: $30.0 million, compared to $26.2 million in 3Q 2007 • 2008: Continue to exp
Slide 47: Outlook for non-cash items
Outlook for non-cash items Amortization of intangibles • 3Q 2008: $13.6 million, compared to $11.7 million in 3Q 2007 • 2008: Continue to expect approximately $52 million 92 Outlook for The McGraw-Hill Companies Taking a hard line on company expenses while prudently managing investments to support a
Slide 48: 3Q 2008 Earnings Call
3Q 2008 Earnings Call October 28, 2008 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 will be available for downloading from www.mcgraw-hill.com/investo
The McGraw-Hill Companies — Q3 2008 Earnings Presentation on 6ix