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The McGraw-Hill Companies, Inc. (MHP)

Q2 2009 Earnings Call

July 28, 2009 8:30 am ET

Executives

Donald Rubin - Investor Relations

Terry McGraw - Chief Executive Officer

Bob Bahash - Chief Financial Officer

Analysts

Peter Appert - Piper Jaffray

Michael Meltz - JPMorgan

Edward Atorino - Benchmark

Craig Huber - Barclays Capital

Presentation

Operator

Good morning. Welcome to the McGraw-Hill Companies second quarter 2009 earnings call. (Operator Instructions).

To access the webcast and slides, go to www.mcgraw-hill.com then click on the link for the earnings announcement conference call. At the bottom of the webcast page are three links. Click on windows or real media if you want to access the slides and audio on your computer. If you only want to view the slides and plan to remain on the telephone, click the third link with the telephone icon. (Operator Instructions).

I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies.

Donald Rubin

Thank you. Good morning to our worldwide audience. Thanks everyone for joining us this morning for the McGraw-Hill Companies second quarter earnings call. I'm Donald Rubin Senior Vice President, 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 second quarter results. We trust you've all had a chance to review the release. If you need a copy of it, and financial schedules they could be downloaded at www.mcgraw-hill.com.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. 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, so 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 updates will last approximately an hour. After our presentation, the meeting will be open to questions. I am pleased now to introduce the Chairman, President and CEO of the McGraw-Hill Companies, Terry McGraw.

Terry McGraw

Thank you for joining us this morning. Welcome to our review of the second quarter earnings and our outlook for the remainder of 2009. With me today, besides Don, is Bob Bahash, Executive Vice President and Chief Financial Officer. I will be starting off by reviewing our operating results and Bob will provide in depth outlook on our key financials. Of course, as Don said, after our presentation, we'll go in any direction that anybody would like to go with questions or comments.

Earlier today, we reported our second quarter results. Earnings per diluted share were $0.52, and that included $0.06 for a net restructuring charge, which was $0.03 and a loss on a divestiture, which was also $0.03 for the earnings. Revenue in the second quarter decreased 12.4% to $1.5 billion.

At this point in the year, we still see challenges in the school marketplace as state budget pressures persist, but there are also signs that the economic activity has begun to recover. An improving flow of credit is helping to lay the groundwork for recovery. In financial markets, spreads are narrowing and should continue to tighten. Money managers and insurance companies are putting more money to work, and there is renewed investor interest in the non-financial investment grade bonds and in even speculative grade instruments as well.

In the second quarter, we took some important steps to prepare for the future. First, we took a $0.03 restructuring charge for a workforce reduction of approximately 550 positions, about 2.5% of the total workforce. A key step in this restructuring was the reduction of approximately 340 positions at McGraw-Hill Education, as we combined our supplemental and basal operations. I'll discuss this in a little more detail in a little bit.

Secondly, we sold Vista Research, and that resulted in a pretax loss of $13.8 million or $0.03 per diluted share. Thirdly, we announced that we're exploring strategic options for BusinessWeek. The takeaway is clear. In preparing for the future, this Management team will continue to align resources with the company's strategic outlook and growth opportunities in the market.

With that as background, let's take a look at our segments and how they performed and the prospects for the rest of the year and how we're looking at 2010, in each of these markets as well.

For McGraw-Hill education, this year is a tale of two markets. First is the declining sales in the elementary/high school market and the second one is the sustained growth in the US college and university market. Both trends were evident in the segment's second quarter performance and undoubtedly will be factors in our second half results.

For this segment in the second quarter, revenue declined 17.2%, reflecting a 22.7% falloff for the McGraw-Hill School Education Group and a 6.9% decline for the McGraw-Hill Higher Education Professional and International Group. Including a net pretax restructuring charge of $11.6 million, operating profit declined by 70.1%. The operating margin was 3.8%.

By now, everyone has probably heard about the challenges in this year's elementary/high school market. State budgets for education are under pressure. There are substantial cutbacks in historic buying levels in the adoption states. Federal stimulus funds are still trickling into the market, and with the sales opportunities shrinking this year in Florida and California, we are reducing our estimate for the 2009, state new adoption market to $500 million to $550 million.

Our new estimate includes some modest benefits from the Federal stimulus funds that we have been able to identify. We had been originally forecasting $550 Million to $600 million. Federal stimulus funds are still the wild card in this year's market. Without the benefit of stimulus funds, we still expect the high and the EL/HI market to decline by 15% to 20% this year.

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