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The McGraw-Hill Companies, Inc. (MHP)

Q1 2009 Earnings Call

April 28, 2009 8:30 am ET


Donald Rubin - Senior Vice President Investor Relations

Harold McGraw III - Chairman, President and CEO

Robert Bahash - Executive Vice President and Chief Financial Officer


Michael Meltz – JP Morgan

Peter Appert – Piper Jaffray

Craig Huber – Barclays

[Adrian De St. Helier] – Unidentified Company



(Operator Instructions) Welcome to McGraw-Hill Companies First Quarter 2009 Earnings Call. Now I’d like to introduce Mr. Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies.

Donald Rubin

Good morning to our worldwide audience and thank you for joining us for the McGraw-Hill Companies First Quarter Earnings Call. I am 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 we issued a news release with our first quarter results. We trust you all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at Before we begin this morning I need to provide certain cautionary remarks about forward looking statements.

Except for historical information, the matters discussed in the 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’re 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 212-512-2246 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.

Terry McGraw

The outlook that we have for 2009 as Don mentioned with me today is Bob Bahash our Executive VP and Chief Financial Officer. On today’s call I’ll be reviewing the operating results and Bob will provide an in depth look at our financials.

Earlier this morning we reported first quarter earnings. Diluted earnings per share was $0.20, revenue was $1.1 billion down 5.7% compared to the same period last year. Given the seasonality of our business, the first quarter is typically the smallest of the year which means nearly all of our earnings in 2009 are still to be achieved.

With the biggest part of the year ahead of us, we will spend time this morning discussing the outlook for the McGraw-Hill Companies and the importance of cost containment in this kind of environment. We are hopeful that the economy has already absorbed the biggest blows and may be bottoming out if not now, by some point this summer. The pace of decline has slowed and there are now indications that the second half will look much better then the first half.

We are carefully monitoring the Federal Government’s efforts to support the financial sector and restore confidence in credit markets. Federal stimulus programs also have an important role to play in helping states resolve their fiscal problems and improve the outlook for education budgets. Gauging the impact of the Federal initiatives on our markets is important so we’re going to spend time this morning assessing recent development and what they may portend. We have a lot of ground to cover so let me get started.

Let me begin with McGraw-Hill Education. In the first quarter our results reflected the seasonally slow start in the elementary, high school market, strong second semester ordering in the US College and university market and the impact of foreign exchange on our international business. For the segment in the first quarter revenue declined by 5.3%, stringent cost containment helped cut the operating loss by 15.7% and improved the operating margin by 300 basis points.

Revenue for the McGraw-Hill School Education Group decreased by 11.6% and revenue for the McGraw-Hill Higher Education Professional and International Group was off 0.7%, in constant currency, this group grew though at 6.2% rate.

The education market this year is still sending mixed signals. In the US college market, enrollments are growing and we still expect the market to grow by 3% to 4% and we expect to match that growth rate. In short, we are still on track to benefit from the counter cyclical performance of the college and the higher education market.

In the elementary, high school market the outlook is more difficult to call because it’s nearly impossible at this time to gauge the impact of the Federal Stimulus plan on educational spending. Without the benefit of the stimulus the el-hi market would decline this year by 15% and possibly as much as 20%.

A softening state new adoption market is contributing to this decline. The 2009 state new adoption market was also expected to be down because Texas is not buying new materials. A couple of months ago we estimated the market for the state new adoptions to be $675 to $725 million range. Now, however, we believe that a projection of $550 to $600 million is more realistic. This represents a decline of more than 35% from last year.

We are adjusting our estimate because of reduced opportunities in two key adoption states; California and Florida where many school districts have decided to postpone purchasing for budgetary reasons. The key word here is postpone.

To be clear, the new estimate does not take into account the potential impact of any Federal Stimulus package which could make a meaningful difference in some states and some product categories. The first stimulus funding to reach the local districts will take the form of grants for IDEA special education programs and Title 1 programs for disadvantaged students.

Although the districts must observe certain guidelines they will have wide discretionary control over the use of the funds. We have conducted an outreach effort to schools nationwide to provide information about the grants and about McGraw-Hill products and services that would be appropriate for purchase under the guidelines.

The first installment of these grants was released by the US Department of Education on April 1. That would be a $6 billion for IDEA programs and $5 billion for Title 1. By law, state level agencies can keep only 4% of these funds for administrative costs. They are required to distribute the remainder to eligible districts expeditiously which should be sometime in the second quarter. Beginning in July a second round of IDEA and Title 1 grants for the same amount, $6 billion of IDEA and $5 billion for Title 1 will also be distributed.

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