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The McGraw-Hill Companies, Inc. (MHP)

Q3 2009 Earnings Call

October 26, 2009 8:30 am ET

Executives

Donald Rubin - Senior Vice President Investor Relations

Harold McGraw III - Chairman, President and CEO

Robert Bahash - Executive Vice President and Chief Financial Officer

Analysts

Peter Appert – Piper Jaffray

Craig Huber – Private Investor

Michael Meltz – JP Morgan

Presentation

Operator

(Operator Instructions) Welcome to McGraw-Hill Companies Third Quarter 2009 Earnings Call. I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies.

Donald Rubin

Good morning to our worldwide audience that has joined us this morning for the McGraw-Hill Companies Third 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 we issued a news release with our third quarter results. We trust you’ve all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.McGraw-Hill.com. Before we begin 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 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 212-512-2247 subsequent to this call.

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

Terry McGraw

Welcome to our review of the third quarter earnings and the outlook for the remainder of the year. As Don mentioned, with me today is Bob Bahash our Executive Vice President and Chief Financial Officer. We’ll start today by reviewing the operating results and then Bob will provide an in depth look at some of our key financials. After our presentations obviously we’ll be pleased to answer any questions or take any comments that you may have about the McGraw-Hill Company. With that let’s get started.

Earlier today we reported third quarter results. Earnings per diluted share were $1.07, revenue in the third quarter decreased by 8.4%. We also raised earnings guidance for the year, we now expect to achieve the top end of our $2.20 to $2.25 earnings per share guidance. At the end of the second quarter we had anticipated coming in at the lower end of that range. The new earnings per share guidance excludes second quarter restructuring charge of $0.03, a $0.03 loss on the divestiture of Vista Research in May and a projected $0.02 gain on the sale of BusinessWeek which will close in the fourth quarter.

As I’ve said before, in this environment management is reviewing, obviously, everything within the portfolio and that obviously included evaluating strategic options for BusinessWeek. BusinessWeek in its 80 years with McGraw-Hill Companies has made significant contributions to this company. We must focus on resources on areas with the greatest opportunities for growth and that means building size and scale globally in essential markets and expanding our digital capabilities. In reaching an agreement with Bloomberg we believe that BusinessWeek will continue to operate within an organization that shares the same high standards for editorial independence, integrity and excellence that are the hallmarks of this publication.

In looking ahead, we’re encouraged by recent reports that suggest an improving economic picture. Although the recovery is still expected to be sluggish our economists forecast GDP growth of 1.8% next year after a decline of 2.7% in 2009 and that shows GDP growth in the third and the fourth quarter. Stimulus spending is helping the economy but it appears that the funds are being spent more slowly then expected. That certainly seems to be the case this year in education but we are also seeing some positive indications that Federal Reserve and Treasury programs are contributing to improvement in the credit markets.

Let’s start our review of operations and let’s begin with an outlook for the Financial Services segment. Our expectations for a pick up in the second half of this year at Financial Services started to take shape in the third quarter; improving market conditions, tighter spreads, and a surge in global debt issuance are evident in our results. For the first time in two years year over year quarterly revenue increased at Standard & Poor’s credit market services. The modest increase, 0.7%, reflects a 6.5% gain in transaction revenue despite continuing softness in the structured finance market.

Revenue at S&P Investment Services, which account for about one third of the segments top line declined by 7.6%. For the Financial Services segment in the third quarter revenue declined by 2.2%, operating profit decreased by 10.1% and the operating margin was 40.2%.

The results, again underscore the position S&P Credit Market Services established in global markets. With total new issuance in the third quarter growing faster in Europe which was up 39.2% than in the United States which was up 31.4%, international revenue increased 3.3% in the third quarter or $6.7 million despite a $7.7 million hit by foreign exchange. Foreign source revenue accounted for 49.1% of S&P Credit Market Services revenue in the third quarter.

Growth in the United States and European corporate industrial debt issuance was a key factor in these results. In the United States new issued dollar bond of industrials increased by 98.9% in the third quarter, in Europe the growth was 120.1% for this same period. S&P Credit Market Services also benefited from a 491.3% increase in high yield issuance and obviously off a low base in the United States in the third quarter. Speculative grade issuance was up 226.2% in Europe.

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