S&p Global Inc. · NYSE:SPGI
S&p Global — The McGraw-Hill Companies — Q2 2008 Earnings Presentation
46 slides from S&p Global's earnings presentation, Jul 29, 2008
Slide 1: 2Q 2008 Earnings Call
2Q 2008 Earnings Call July 29, 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
“Safe Harbor” Statement Under The Private Securities Litigation Reform Act of 1995 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. Su
Slide 3: MHP 2Q 2008 results
MHP 2Q 2008 results EPS • 2Q 2008: $0.66 – Includes pre-tax restructuring charge of $23.7 million, or $0.05 per diluted share, primarily for severance costs relating to a workforce reduction of 395 positions Revenue • 2Q 2008: Declined 2.6% to $1.7 billion 4 Outlook for U.S. economy Housing recessio
Slide 4: Outlook for U.S. economy
Outlook for U.S. economy Federal Reserve not expected to change interest rates at August 5th meeting • Next move: Rate hike in 2Q 2009 Wyss’ forecast for U.S. GDP: • Growth of 1.7% in 2Q 2008 and 1.8% in 3Q 2008 as consumers spend rebate checks • Negative growth in 4Q 2008 and 1Q 2009, followed by 3
Slide 5: 2Q results at McGraw-Hill Education
McGraw-Hill Education Financial Services Information & Media 2Q results at McGraw-Hill Education 2Q 2008 segment results Revenue + 3.6% increase to $670.8 million Operating profit Reduced by $10.9 million to $69.5 million (includes a pre-tax restructuring charge of $8.5 million) Operating margin 10.
Slide 6: 2Q results at McGraw-Hill Education
2Q results at McGraw-Hill Education School Education Group Revenue: + 6.9% to $438.2 million Higher Education, Professional and International Group Revenue: - 2.1% to $232.6 million 10 Improving prospects in adoption states 2008: Expect to capture about one-third of this year’s state new adoption ma
Slide 7: First signs of successful campaigns in adoption states
2Q: First signs of successful campaigns in adoption states Florida: Exceptional year taking shape • Treasures, our balanced basal program, has been widely adopted • Alternative basals, Imagine It! and Reading Mastery Plus, will enhance capture rate Our products will account for more than half of 200
Slide 8: Campaigns in adoption states; supplemental market
2Q: First signs of successful campaigns in adoption states Reading/Literature (K–12) • Expect solid results in Alabama, Indiana, Louisiana, and Oklahoma Spotlight on Music is leading the elementary market Fine arts, health, business and vocational lines are performing well in states adopting these c
Slide 9: Outlook for el-hi market in 2008
Outlook for el-hi market in 2008 Solid year taking shape in state new adoption market Bulk of open territory orders traditionally come in 3Q • Market should grow 1% to 2% Expect to gain share in overall K–12 market • Market should grow 4% to 5% 16 Testing: Growth with a spectrum of assessment produc
Slide 10: New NCLB requirements play to our strength in testing
New NCLB requirements play to our strength in testing States adding a growth component to school accountability programs • Growth model looks at an individual student’s academic performance • Determines if student is on track to become proficient Requires development of a vertical scale to see how s
Slide 11: Outlook for McGraw-Hill Education
2Q results for Higher Education, Professional and International Group Expect softness in professional markets for balance of the year • Softness is a combination of: – Tough comparisons; last year had benefit of new edition of Encyclopedia of Science and Technology – Impact of economy on 2008 bookst
Slide 12: Financial Services 2Q 2008 segment results
McGraw-Hill Education Financial Services Information & Media Financial Services 2Q 2008 segment results Revenue -10.4% to $735.5 million Operating profit -25.4% to $299.2 million Operating margin 40.7%, vs. 48.9% in 2Q 2007 (restructuring charge reduced operating margin by just over 200 basis points
Slide 13: Financial Services
Financial Services 1H 2008 segment results Operating margin 40.5% including 2Q restructuring charge (restructuring charge reduced operating margin by 110 basis points) 24 The outlook for Financial Services Diversification contributes importantly to S&P’s results Strategy buffers Standard & Poor’s ag
Slide 14: Outlook for Financial Services
Outlook for Financial Services If decline experienced in 1H 2008 in structured finance continues for remainder of year, segment revenue would decline 7% to 9% • Would also expect a 500 to 600 basis point drop in operating margin 26 Revenue vs. new issuance in 2Q 2008 Revenue % Change New Issue Volum
Slide 15: Benefits of a diversified and resilient portfolio
The benefits of a diversified and resilient portfolio Investment Services • 2Q 2008: Up 22.8% • 1H 2008: Up 20.4% • Still expect double-digit revenue growth for non-ratings businesses for balance of year 28 Data and information benefiting Investment Services Capital IQ continues to add customers her
Slide 16: Continuing to expand index products and services
Continuing to expand index products and services $206.3 billion in assets under management in ETFs based on S&P indices at end of 2Q 2008 • 15.5% increase compared to 2Q 2007 Sales of custom indices and data also increased 30 Continuing to expand index products and services Robust trading in exchang
Slide 17: Continuing to expand index products and services
Continuing to expand index products and services New S&P indices in 2008: • 18 new ETFs launched in 2Q 2008 • 31 new ETFs launched in 1H 2008 vs. 46 for all of 2007 • Now a total of 175 ETFs based on S&P indices More indices planned for 2H 2008 32 Diversifying at S&P Credit Market Services Ongoing e
Slide 18: Growth in unearned revenue at Financial Services
Growth in unearned revenue at Financial Services Unearned revenue increased 12.0% to just over $840 million in 2Q 2008 Expect unearned revenue to continue growing 34 Cost containment important in current environment Closely managing costs while making investments • Ensure S&P is prepared for turnaro
Slide 19: U.S. structured finance market continues to decline in 2Q 08
U.S. structured finance market continues to decline in 2Q 2008 New issue dollar volume down: –75.4% in April –81.8% in May –84.0% in June –79.0% for 1H 2008 Only asset-backed securities issuance is up after six months • Just 0.2% 36 Turbulence in credit markets has carried into 2Q 2008 U.S. RMBS U.S
Slide 20: Turbulence in credit markets has carried into 2Q 2008
Turbulence in credit markets has carried into 2Q 2008 U.S. Corporates U.S. Public Finance 210 60 (in billions of US$) 180 (in billions of US$) 184.8 54.7 55.6 58.0 150 145.3 139.1 40 44.1 43.5 43.644.9 120 126.4 129.4 119.5 106.7 34.0 33.5 33.7 90 97.8 60 83.4 20 22.2 22.3 69.2 61.5 49.7 30 0 0 Jan
Slide 21: Signs the market is healing, but not yet healed
Signs the market is healing, but not yet healed Expect growth in international markets in 2H 2008 • Will benefit from geographic expansion into Gulf and Central and Eastern Europe Refinancing requirements of industrials in Europe should be source of growth Activity remains very slow in structured ma
Slide 22: Growing U.S. interest in covered bonds
Growing U.S. interest in covered bonds Some market participants believe covered bonds could stimulate U.S. mortgage market • Effort in U.S. to create a legal framework for covered bonds • If effort succeeds, large capitalized banks could be important issuers Two levels of protection with covered bon
Slide 23: How S&P's FIRMS will drive revenue growth
How S&P’s FIRMS will drive revenue growth Specific strategic initiatives for our target markets Risk Analytics Evaluations Research and Tools • Offer a rebranded and integrated platform for analysis and modeling of structured products • Offer IMAKE, a new integrated credit risk modeling platform to
Slide 24: Update on legal situation
Update on legal situation MHP won its first court decision related to subprime litigation • Court dismissed Blomquist action – Suit filed in California last August alleging various state and federal claims against numerous financial institutions, government agencies, McGraw-Hill and individuals New
Slide 25: Update on regulatory issues
Update on regulatory issues S&P remains actively engaged with regulatory issues and is making progress on its commitment to be part of the solution • Working with policymakers and market participants to enable greater transparency 48 Update on regulatory issues June 5th: S&P and two other ratings ag
Slide 26: Update on regulatory issues
Update on regulatory issues SEC held two public meetings in June to discuss proposed new rules and regulations for NRSROs • June 11: SEC discussed comprehensive set of rules that have potential to bring more transparency to structured market • June 25: SEC met to discuss use of NRSRO ratings in its
Slide 27: Update on regulatory issues
Update on regulatory issues (cont.) • No indication that ratings agencies compensated analysts in a manner contrary to their policies • SEC recognized that ratings agencies enhanced their procedures in connection with their registration as NRSROs in 2007 –Report noted further improvements to manage
Slide 28: Update on regulatory issues
Update on regulatory issues S&P responded to SEC’s June 11 request for comments on proposed rules to bring more transparency to structured market • S&P basically supports the SEC proposals • We believe dialogue with policymakers and regulators is important and so do policymakers –Issues are complex
Slide 29: Update on regulatory issues
Update on regulatory issues • S&P agrees with SEC that it should have policies and procedures that prevent it from structuring products it rates; S&P already does –S&P is concerned about interference with free flow of information between ratings agencies and issuers –Communications should be encoura
Slide 30: Update on regulatory issues
Update on regulatory issues Expect to see draft of proposed regulations from European Commission • We believe any steps European regulators consider for additional oversight of rating agencies would be best addressed though globally coordinated approach –Recognizing benefits of consistency for inves
Slide 31: Outlook for Financial Services
Outlook for Financial Services Summary • Legal and regulatory risk remains low • Double-digit revenue growth for S&P Investment Services • Revenue for segment could be off 7% to 9% for year if first half decline in structured finance continues for remainder of year • Expect a 500 to 600 basis point
Slide 32: Information & Media
Information & Media 2Q 2008 segment results Revenue + 6.8% to $266.9 million Operating profit +68.2% to $24.8 million Operating margin 9.3%, up from 5.9% in 2Q 2007 62 Growth at Business-to-Business Group Revenue grew 7.8% in 2Q to $240.4 million • Business-to-business products key to 2Q results • A
Slide 33: Platts – a global growth product
Platts – a global growth product Proportionately, Platts does more business overseas than any other MHP product • Benefiting from demand for petroleum and natural gas products • Demand shows no sign of diminishing in today’s volatile energy markets Platts is expanding in new areas now serving steel–
Slide 34: Outlook at BusinessWeek; political television advertising
The outlook at BusinessWeek Ad pages off 17.3% through July 28 issue, according to Publishers Information Bureau Circulation is growing New syndicated studies indicate that BusinessWeek’s audience is younger and more affluent than in past years 66 Solid outlook for political television advertising i
Slide 35: Outlook for Information & Media
Outlook for Information & Media Summary • More progress this year • Revenue growth of 6% to 8% • Improvement in operating margin 68 Outlook for The McGraw-Hill Companies Summary • Year-over-year comparisons easier in second half • Still expect 2008 EPS in $2.65-$2.75 range –Excluding 2Q 2008 restruc
Slide 36: Half way to our 2008 stock buyback target
Robert J. Bahash Executive Vice President and Chief Financial Officer The McGraw-Hill Companies Half way to our 2008 stock buyback target 2Q 2008: 4 million shares repurchased for $170.8 million; average price of $42.69 1H 2008: 7.4 million shares repurchased for $304.8 million; average price of $41
Slide 37: Modest increase in net debt
Modest increase in net debt Net debt: $1.4 billion • As of June 30, increase of approximately $170 million versus end of 1Q 2008 Gross debt: $1.7 billion • As of June 30, comprised of $1.2 billion of unsecured senior notes and $526 million in commercial paper outstanding • Offset by $355 million in
Slide 38: Outlook for free cash flow (cont.)
Outlook for free cash flow (cont.) • Free cash flow in 2H 2008 expected to approximate free cash flow for 2H 2007 • Will benefit from: –Easier comparisons at Financial Services –Reduced investments for purchases of property and equipment as second half of 2007 reflected significant investment in our
Slide 39: Reduced fully-diluted weighted average shares outstanding
Reduced fully-diluted weighted average shares outstanding (WASO) 2Q 2008: 321.1 million shares • 29.2 million share decrease compared to 2Q 2007 • 2.3 million share decrease compared to 1Q 2008 76 Outlook for lower corporate expenses 2Q 2008: Decreased $7.5 million to $33.5 million, compared to a ye
Slide 40: Managing expenses at Financial Services
Managing expenses at Financial Services Year-over-year, 2Q expenses essentially flat on adjusted basis: • Reported expenses: Increased 4.0%, or $16.6 million • Adjusted expenses: Increased 0.4%, or $1.5 million – Excludes $15.2 million second quarter restructuring charge • Comparison benefits from $
Slide 41: Managing expenses at McGraw-Hill Education
Managing expenses at McGraw-Hill Education Year-over-year, expenses increased in 2Q: • Reported expenses: Increased 6.1% • Adjusted expenses: Increased 4.6%, or $26 million Increase driven by: • $9.2 million in higher prepublication costs • Increased marketing costs • Investments in technology, incl
Slide 42: Outlook for growth in unearned revenue
Outlook for growth in unearned revenue 2Q 2008: $1.1 billion • Increased 7.5% year over year • Financial Services: Grew 12% in 2Q – Segment represents approximately three quarters of McGraw-Hill’s unearned revenue • McGraw-Hill Education: Reduction in 2Q due to accelerated fulfillment of orders for
Slide 43: Reducing estimates for 2008 prepublication investments
Reducing estimates for 2008 prepublication investments 2Q 2008: $65.3 million, compared to $75.2 million in same period last year 2008: Now expect $270 million • Down from previous $290 million estimate 84 Lower capital expenditures for property and equipment 2Q 2008: $25.2 million, vs. $60.7 millio
Slide 44: Outlook for non-cash items
Outlook for non-cash items Amortization of pre-publication costs • 2Q 2008: $66.0 million, compared to $56.8 million for 2Q 2007 • 2008: Lowering guidance to $275 million –$35 million increase versus 2007 driven by significant prepublication investments 86 Outlook for non-cash items Depreciation • 2
Slide 45: Outlook for non-cash items
Outlook for non-cash items Amortization of intangibles • 2Q 2008: $13.1 million, compared to $11.5 million in 2Q 2007 • 2008: Expect approximately $52 million 88 2Q 2008 Earnings Call July 29, 2008 Presenters: Harold McGraw III Chairman, President and CEO Robert J. Bahash Executive Vice President an
Slide 46: 2Q 2008 Earnings Call Replay Options
2Q 2008 Earnings Call July 29, 2008 Replay Options Internet Go to www.mcgraw-hill.com/investor_relations • Click on the Earnings Announcement link under Investor Presentation Webcasts Telephone (Available through August 30) Domestic: 800-297-0781 International: +1-203-369-3239 No password required
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