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The McGraw-Hill Companies, Inc. (MHP)

Q4 2008 Earnings Call Transcript

January 27, 2009 8:30 am ET


Donald Rubin – SVP, IR

Harold McGraw III – Chairman, President and CEO

Robert Bahash – EVP and CFO


Peter Appert – Piper Jaffray

Craig Huber – Barclays Capital

Michael Meltz – JP Morgan

Catriona Fallon – Citigroup

Marc Sugarman – Citigroup

Simon Wallace [ph] – ING [ph]

Edward Atorino – The Benchmark Company

Barry Lucas – Gabelli & Company



Good morning and welcome to McGraw-Hill Companies fourth quarter and full year 2008 earnings call. (Operator instructions) I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for McGraw-Hill Companies. Sir you may begin.

Donald Rubin

Thank you and good morning to our worldwide audience and thank everyone for joining us at The McGraw-Hill Companies fourth quarter earnings call. I’m Donald Rubin, Senior Vice President of Investor Relations at the McGraw-Hill Companies. With me this morning are Harold McGraw III, Chairman, President and CEO, and Robert Bahash, Executive Vice President and Chief Financial Officer.

This morning the company issued a news release with our fourth quarter 2008 results. We trust you have all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at Once again that is Before we begin this morning, I need to provide certain cautionary remarks about forward-looking statements.

Except for historical information, the matters discussed in this teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements.

In this regard we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the US Securities and Exchange Commission. We are aware that we do have some media representatives with us on the call, however this call is for investors, and we would ask that questions from the media be directed to Mr. Steve Weiss in our New York office at area code 212-512-2247 subsequent to this call.

Today's update will last approximately an hour. After the presentation, we will open the meeting to questions and answers. It's now my pleasure to introduce the Chairman, President, and CEO of the McGraw-Hill Companies, Terry McGraw.

Harold McGraw III

Okay. Thank you very much Don and good morning to everyone and welcome to our review of the full year and fourth quarter earnings and the outlook for 2009. With me is Bob Bahash, our Executive Vice President and Chief Financial Officer.

On today’s call we will be providing information on our performance in 2008 and discuss our guidance for 2009. After my review of operations Bob will then provide a little bit more in-depth look at our strong financial condition as well as our outlook for free cash flow for 2009 and obviously after that we will take questions and comments and go in any direction you would like.

As Don said earlier this morning we announced results for the fourth quarter and for the full year. I’m very pleased to report that we delivered on the high end of our guidance for the fourth quarter and for the full year. Let us briefly recap those results.

For 2008, we reported 2008 diluted earnings per diluted share of $2.51 and that of course includes a $0.14 per share restructuring charge. Also revenue declined 6.2%.

For the fourth quarter of 2008, we reported diluted earnings per share of $0.37 and that included a $0.05 per share restructuring charge. Revenue declined by 9.8%. To help control expenses we reduced incentive compensation in 2008 by $273.7 million. The restructuring actions in 2008 resulted in a workforce reduction of 1045 positions.

Cost containment was a priority for us in 2008. And it’ll be the same again for this year. If more actions are necessary this year we’re prepared to take them. The challenge in the current environment is obviously is to manage for today while preparing for tomorrow. We will and we still must see how the massive recovery package coming from the Federal government will first one, stimulate the economy; second, relieve budget pressures on state and local government; three, help educational funding; and four, improve the sentiment in capital markets.

Slower economic growth and the weakened housing sector will affect the state and local tax base. At the same time, the demand for local government supported projects may lead to more debt financing. We’ve seen this trend before. Historically there is a clear inverse correlation between state and local operating balances and municipal debt issuance.

The changing financial landscape is both a source of new challenges and new opportunities. While circumstances are favorable, we have responded by investing in fast growing businesses at Standard & Poor’s, the confluence again of content, technology, and distribution is also creating opportunities to improve our potential by producing new digital products and services. For an audience eager to acquire 21st century skills, we’re doing so to maintain our leadership. In this environment we must also preserve and protect a very strong balance sheet.

A strong balance sheet has been the hallmark of this company and we plan to keep it that way. Our cash flow is more than sufficient to meet our requirements for operations, making investments, paying down debt, and returning cash to shareholders. We have paid a dividend every year since 1937. And we have increased it every year since 1974. That is 35 years of increasing the dividend. Few companies can match that record of consistency.

The next decision on the cash dividend will be made tomorrow at the board of directors regular monthly meeting and believe me, our board understands the importance here.

With that background let us review the operations and then 2009 guidance for each segment. And let us begin with Financial Services.

A resilient and diverse portfolio helped cushion the Financial Services segment in the midst of a credit crunch and very challenging comparisons with a very robust 2007. Revenue for S&P Credit Market Services in 2008 declined by 22.5% and by 24.5% in the fourth quarter.

Revenue for S&P Investment Services that is our non ratings business grew by 15% last year and by 7% in the fourth quarter. In 2007, S&P Investment Services produced about 26% of Financial Services revenue. In 2008 it rose to 34% of the total. Revenue for this segment declined by 12.9% for 2008 and by 15.4% in the fourth quarter.

In the face of adverse market conditions we continued to manage our costs diligently. After pre-tax restructuring charges of $25.9 million for a workforce reduction of approximately 340 positions and a $166.0 million decrease in incentive compensation, operating profit declined 22.4% in 2008.

In the fourth quarter, after a pre-tax restructuring charge of $6.6 million for a workforce reduction of approximately 50 positions and a reduction of $36.6 million in incentive compensation, operating profit declined 18.6%. All that effort enabled us to report a 39.8% operating margin for the year and a 34.4% operating margin in the fourth quarter.

The restructuring charges reduced the 2008 operating margin by 98 basis points for 2008 and by 105 basis points in the fourth quarter. The decline in new issue volume obviously had a major impact on 2008 results. As these bar charts illustrate, the decline in the U.S. structured finance new issuance dollar volume was pronounced all year. For 2008 U.S. structured finance new issuance dollar volume was off 79.9% and the weakest in the fourth quarter with an 89.4% decline.

Now corporate and public finance issuance fared better. U.S. corporate dollar volume issuance was up 33.8% for the year as the high-yield market dropped by 73.7%. In the fourth quarter U.S. corporate dollar volume issuance was down 39.3% as the high-yield market came to a virtual halt dropping by 96.3%. But while the new issue dollar volume last year was the weakest in the fourth quarter it is not the whole story for Standard & Poor’s.

As this table illustrates, the revenue performance for the segment and S&P Credit Markets Services did not come close to matching the fourth quarter decline in the U.S. or the global new issue dollar volume. A key to our resiliency in the ratings business is the non-transaction revenue. And that number grew by 5.2% in 2008 and represented 73.1% of S&P Credit Market Services revenue. In the fourth quarter, non-transaction revenue declined by 4.8% and accounted for 78.9% of rating revenue.

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