S&p Global Inc. · NYSE:SPGI
S&p Global — The McGraw-Hill Companies — Q2 2010 Earnings Presentation
44 slides from S&p Global's earnings presentation, Jul 23, 2010
Slide 1: 2Q 2010 Earnings Call
2Q 2010 Earnings Call July 23, 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 2Q 2010 results
MHP 2Q 2010 results 17.3% increase in 2Q EPS • 2Q 2010: $0.61 • 2Q 2009: $0.52 (includes $0.06 total for a restructuring charge and a loss on a divestiture) 2Q revenue: $1.5 billion, a 0.6% increase • Grew 2.7% excluding divestitures of BusinessWeek and Vista Research 4 Financial Services McGraw-Hil
Slide 4: Gaining new clarity on regulatory and legal issues
Gaining new clarity on regulatory and legal issues Signing of Dodd-Frank Act a welcomed development • No surprises in the legislation • We anticipated key provisions becoming law for some time • New legislation calls for greater disclosure, accountability and oversight that we feel will increase con
Slide 5: Key steps S&P has taken to meet regulatory commitments
Key steps S&P has taken to meet regulatory commitments S&P’s Quality, Criteria, Compliance, Risk (QCCR) framework is key • Established control groups independent of the ratings business • Invested in staffing, training, technology and processes around the QCCR functions 8 Key steps S&P has taken to
Slide 6: Creating a leverageable framework to deal with new regulations
Creating a leverageable framework to deal with new regulations S&P spending for QCCR-related items: • 2009: $63 million • 2010: Expect spending to increase by about $15 million Maintaining operating margin forecast for 2010 despite additional costs • Still expect a decline of 100 basis points 10 Cha
Slide 7: Changes required by the Dodd-Frank Act
Changes required by the Dodd-Frank Act Repeal of rule 436(g) • S&P will not consent to the inclusion of its ratings in registration statements and prospectuses • S&P will explore mechanisms outside of registration statements to allow ratings to be disseminated • S&P ratings on new issues and pre-sal
Slide 8: Assessing the new pleading standard in fraud suits
Assessing the new pleading standard in fraud suits Legislation permits lawsuits against a credit rating agency that knowingly or recklessly failed to conduct a reasonable investigation or obtain reasonable verification of the data it uses to determine a rating The new pleading standard will be teste
Slide 9: Latest developments on litigation front
Latest developments on litigation front 13 cases have been dismissed outright • Five cases have been withdrawn • We believe these constitute meaningful precedent Three important legal decisions involving S&P • Two involve a subprime case • Third relates to S&P’s index business and a grant of summary
Slide 10: Latest developments on litigation front
Latest developments on litigation front Abu Dhabi subprime case (continued) On July 20th, Judge Scheindlin allowed the plaintiffs to reinstate one of the ten original claims against both the Credit Rating Agencies and Morgan Stanley • The Judge concluded that she was mistaken in dismissing the aidin
Slide 11: Latest developments on litigation front
Latest developments on litigation front Significant victory in Illinois Circuit Court: • Judge William Maki ruled that index providers are entitled to protection against misappropriation of their indices • Judge Maki observed: “It bears noting that ISE unabashedly admits it attempted to create a com
Slide 12: 2Q 2010 results at Financial Services
2Q 2010 results at Financial Services 2Q started strong but softened in May and June • Growing doubts about the pace of economic recovery • Uncertainty developed over European sovereigns and bank debt 22 Interest rate spreads: A key gating factor for issuance Credit spreads top 5-year moving average
Slide 13: Surge in U.S. bank loan ratings
Surge in U.S. bank loan ratings U.S. Syndicated Leveraged Bank Loans (Rated BBB- or below) $70 $60 (in billions of US$) $66.5 $50 $40 $43.4 $30 $20 $10 $15.8 $16.0 $0 1Q 2Q 2009 2010 Source: Standard & Poor’s Leveraged Commentary & Data 24 Tracking worldwide corporate issuance: Softening in 2Q 2010
Slide 14: The outlook for maturing U.S. corporate debt
The outlook for maturing U.S. corporate debt U.S. Corporate Debt $600,000 $500,000 (in millions of US$) $400,000 $397,442 $270,572 $300,000 $159,934 $114,363 $200,000 $53,510 $100,000 $120,599 $183,363 $207,495 $200,669 $156,472 $0 2010 2011 2012 2013 2014 Investment Grade Speculative Grade Data as
Slide 15: Tracking 2010 new issuance
Tracking 2010 new issuance: U.S. public finance through June U.S. Public Finance 140 (in billions of US$) 120 125.3 100 111.6 107.2 80 90.4 60 52.0 40 40.1 46.7 39.9 38.6 43.7 32.9 33.4 29.3 20 25.6 24.7 27.6 0 Jan Feb Mar Apr May Jun Q1 Q2 Source: Thomson Financial, Harrison Scott Publications, Sta
Slide 16: S&P rated 95% of the addressable U.S. market in 2009
S&P rated 95% of the addressable U.S. market in 2009 30 S&P rated 89% of the addressable European market in 2009 31
Slide 17: S&P's ratings track record: Meeting the test of time
S&P’s ratings track record: Meeting the test of time Global Corporate Average Cumulative Default Rates (1981-2009) (%) • Over a long period, higher ratings are associated with lower default rates, and lower ratings see higher default rates Source: Table 24 in “2009 Annual Global Corporate Default St
Slide 18: S&P's ratings track record: Meeting the test of time
S&P’s ratings track record: Meeting the test of time S&P conducted a comprehensive review of credit ratings— corporate, government, and structured finance debt • “Default, Transition, and Recovery: A Global Cross-Asset Report Card of Ratings Performance In Times of Stress” published in June 2010 – D
Slide 19: Finding new ways to grow S&P Indices
Finding new ways to grow S&P Indices S&P will be introducing new indices in: • Commodities • Fixed income • Equities • Strategy • Custom Goal: An index for every type of investment 36 2010 outlook for Financial Services Summary • New clarity on the regulatory and legal front • New requirements are m
Slide 20: 2Q 2010 segment results at McGraw-Hill Education
Financial Services McGraw-Hill Education Information & Media 2Q 2010 segment results at McGraw-Hill Education Revenue +1.8% to $565.0 million • School Education Group: (4.0%) to $324.9 million • Higher Education, Professional and International Group: +10.8% to $240.1 million Operating Profit $51.6 m
Slide 21: State new adoptions will grow in 2010 despite budget pressures
State new adoptions will grow in 2010 despite budget pressures Funding concerns drove reduced purchasing in Spring 2010 • California: Fewer districts made new reading, literature, and math purchases • South Carolina: Legislature did not provide funding which effectively cancelled the 9–12 math adopt
Slide 22: Still expect 30% share in state new adoption market
Still expect 30% share in state new adoption market Opportunities in Texas, Florida, and California • Texas: Will capture about 40% of the K–5 reading and about 18% of 6–12 literature –Some orders deferred; will ship in 3Q • Florida: Anticipate winning 40% of the 6–8 math market, about 27% of the 9–
Slide 23: Outlook for the testing market
Outlook for the testing market Gains in the formative testing market were offset by the planned phase out of statewide custom contracts in Florida and Arizona 44 Significant federal funding is being pumped into el-hi market Increase in federal funding remains a wildcard in this market • We are track
Slide 24: Federal funding and growth opportunities
Federal funding and growth opportunities 2009: American Recovery and Reinvestment Act (ARRA) • $11.5 billion available for distribution to the states in 2010 through Phase 2 of the State Fiscal Stabilization Fund –Phase 1: Most of the funds were used to save teaching jobs –Phase 2: Funds may be used
Slide 25: Potential funding for assessment and instructional materials
Potential funding for assessment and instructional materials Race to the Top proposals include formative testing and reporting • States winning grants will require these products and services McGraw-Hill products are aligned with ARRA funding: • Formative products: Acuity, Yearly ProgressPro, and Wr
Slide 26: Growing digital opportunities in higher education
Growing digital opportunities in higher education Revenue is growing at double-digit pace More than 1.8 million registered students and instructors are using McGraw-Hill Connect™ and other homework management products New partnership with Blackboard is increasing access to our suite of digital produ
Slide 27: New digital initiatives in professional markets
New digital initiatives in professional markets Digital products are producing double-digit growth in professional markets We now have 5,000 e-books available • Sales accelerated in April following the Apple’s iPad introduction • e-book is becoming a staple of the Business-to- Consumer market 52 New
Slide 28: 2010 outlook for McGraw-Hill Education
2010 outlook for McGraw-Hill Education Growth in key education markets in 2010 • 4% to 6% in the elementary-high school market • 5% to 7% in the U.S. college market Segment revenue: Low single-digit growth • Down from previous guidance of 6% to 7% given more challenging el-hi market Operating margin
Slide 29: 2Q 2010 results at Information & Media
2Q 2010 results at Information & Media Revenue (5.1%) to $224.2 million • +7.4% excluding divestiture of BusinessWeek • Business-to-Business Group: (7.8%) to $198.9 million (+5.6% excluding BusinessWeek) • Broadcasting Group: +24.0% to $25.3 million Operating Profit Increased $33.1 million to $47.5
Slide 30: Broadcasting: Improvement in 2Q results
Broadcasting: Improvement in 2Q results 2Q: Revenue increased 24.0% vs. 2Q 2009 Improved national, local and political time sales • Pick up in automotive advertising a key factor in national and local • Benefitted from June 8th primary in California and the governor’s contest in that state 3Q: Polit
Slide 31: Outlook for 2010: The McGraw-Hill Companies
Outlook for 2010: The McGraw-Hill Companies Previous earnings per diluted share guidance for 2010 was $2.55 to $2.65 • Due to choppiness in some of our key markets, we now expect to finish the year at the low end of that range 60 Robert J. Bahash Executive Vice President and Chief Financial Officer
Slide 32: MHP enters 3Q in a strong financial position
MHP enters 3Q in a strong financial position Free cash flow is building There is no short-term debt outstanding Long-term debt does not come due until 2012 Started repurchasing shares in 2Q 2010 62 Update on share repurchase program Repurchased 6.5 million shares for a total cost of $186.9 million •
Slide 33: Update on diluted weighted average shares outstanding (WASO)
Update on diluted weighted average shares outstanding (WASO) 2Q 2010: 313.2 million shares Relatively flat compared to 2Q 2009 • Repurchases offset by issuance related to employee plans and stock price appreciation 3.1 million share decline from 1Q • Reflects weighted impact of 2Q share repurchases
Slide 34: Outlook for free cash flow in 2010
Outlook for free cash flow in 2010 First half 2010: $98 million • $61 million increase from first half 2009 –Primarily due to improved operating results and a focus on asset management 2010: Now expect free cash flow in the range of $600 million to $650 million • Versus previous estimate of $550 mil
Slide 35: Outlook for pension plan funding
Outlook for pension plan funding 2010: We do not anticipate any funding requirements for U.S. pension plan • Pension expense is expected to increase roughly $15 million in 2010 versus previous estimate of $20 million 68 2Q expense savings at McGraw-Hill Education 2Q 2010: Adjusted expenses declined
Slide 36: 2010 expense guidance for McGraw-Hill Education
2010 expense guidance for McGraw-Hill Education Unchanged operating margin and low single-digit increase in expenses for 2010 • Versus previous guidance of a 6% to 7% increase in expenses –Implies a mid single-digit increase in expenses in the second half –Higher selling and marketing expenses assoc
Slide 37: 2010 expense guidance for Financial Services
2010 expense guidance for Financial Services Expect 7% to 8% increase • Compared to previous guidance of roughly 9% to 10% increase versus 2009 adjusted expense Driven by: • Continued investment in fast growing businesses • Carry over impact of 2009 hires and planned hires in 2010 • Additional inves
Slide 38: 2010 expense guidance for Information & Media
2010 expense guidance for Information & Media 2010: Expect expenses to decline in the low teens versus 2009 • Primarily reflects the $38 million in savings from the divestiture of BusinessWeek 74 2010 outlook for corporate expenses 2Q 2010: $37.6 million • $8.3 million increase compared to 2Q 2009 –
Slide 39: Reduction in 2Q 2010 prepublication investments
Reduction in 2Q 2010 prepublication investments 2Q 2010: $30.1 million • $12.2 million decrease versus 2Q 2009 First half 2010: $60 million • $25.1 million decrease versus first half 2009 • Decline is largely due to timing; we expect increased investments in second half 76 Outlook for prepublication
Slide 40: Increasing property and equipment expenditures
Increasing property and equipment expenditures 2Q 2010: $14.5 million • $5.6 million increase versus 2Q 2009 First half 2010: $22.1 million 2010: Expect $90 million to $100 million • Expect increased investment in second half • Full year compares to $68.5 million in 2009 • Largely reflects increase
Slide 41: Outlook for non-cash items: Depreciation
Outlook for non-cash items: Depreciation 2Q 2010: $26.2 million • Compared to $28.8 million in 2Q 2009 2010: Continue to expect approximately $115 million • Compared to $113 million in 2009 80 Outlook for non-cash items: Amortization of intangibles 2Q 2010: $13 million First half 2010: $23 million 2
Slide 42: Outlook for net interest expense
Outlook for net interest expense 2Q 2010: $20.8 million • Compared to $18.5 million in 2Q 2009 and $22.0 million in 1Q 2010 2010: Expect net interest expense to be roughly comparable to 2009, which was $76.9 million 82 Outlook for effective tax rate 2Q 2010: 36.4% • Unchanged from 2009 2010: Expect
Slide 43: Outlook for unearned revenue in 2010
Outlook for unearned revenue in 2010 2Q 2010: $1.1 billion • 4.2% increase compared to 2Q 2009 • 7.0% increase, at constant foreign currency exchange rates and excluding impact of BusinessWeek divestiture, compared to 2Q 2009 –Excluding the impact of a deferral of revenue at McGraw-Hill School Educa
Slide 44: 2Q 2010 Earnings Call
2Q 2010 Earnings Call July 23, 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 call
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