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The McGraw-Hill Companies, Inc. (MHP)

Q4 2009 Earnings Call

January 26, 2010 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

Craig Huber – Access 342

Peter Appert – Piper Jaffray

Michael Meltz – JP Morgan

Edward Atorino – Benchmark

Brian Shipman – Jefferies

Presentation

Operator

(Operator Instructions) Welcome to McGraw-Hill Companies Fourth Quarter and Full Year 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. Thank you for joining us for the McGraw-Hill Companies Fourth Quarter and Full Year 2009 Earnings Call. I’m Donald Rubin, Senior Vice President of Investor Relations at the McGraw-Hill Companies. With me today 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 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 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

Welcome to our review of the fourth quarter earnings and the outlook for 2010. As Don said, with me today is Bob Bahash, Executive VP and Chief Financial Officer. We will start today by reviewing the fourth quarter operating results and then we’ll move on to the prospects for 2010. Bob will then provide an in depth look at our financials. After the presentation, as Don said, we’ll be pleased to address any comments or questions about the McGraw-Hill Companies that you may have.

Earlier today we reported a 43.2% increase in diluted earnings per share for the fourth quarter. Diluted earnings per share of $0.53 in the fourth quarter included a pre-tax gain of $10.5 million or $0.02 on the divestiture of BusinessWeek in December. That compares with a $0.37 last year which included a restructuring charge of $0.05 per diluted share. Revenue increased by 3.3% in the fourth quarter.

The fourth quarter results mark the first quarterly increases in diluted earnings per share and revenue for the McGraw-Hill Companies since the third quarter 2007. These results set the stage for more growth in 2010. Our assessment of improving prospects is reflected in the guidance of $2.55 to $2.65 per diluted share for 2010.

We’re encouraged by the improvement in the economy which has finally begun to recovery, albeit it at a modest pace. Financial markets are definitely improving. Bond spreads have narrowed, interest rates remain low, our Chief Economist at Standard & Poor’s, David Weiss believes no tightening by the Federal Reserve is likely before this summer and perhaps not until after the November elections. We expect a better year in our Education markets.

Last week the Board of Directors underscored its confidence in our financial strength and growth prospects by increasing the dividend by 4.4% and announcing the corporation’s intention to resume share repurchases this year. We will buy back over time the 17.1 million shares remaining in the program that was authorized by the Board in 2007.

We have now increased the dividend annually for 37 consecutive years. Since 1974 the dividend has grown at an average compound annual rate of 9.9%. Since 1996 we have returned approximately $9.4 billion to shareholders and that’s through dividends as well as stock buyback.

With that as an overview let’s take a closer look at our operations and the prospects for 2010 and we’ll start with the McGraw-Hill Education.

A solid finish in the key education markets helped produce an upswing in the fourth quarter performance at McGraw-Hill Education. In the fourth quarter for McGraw-Hill Education revenue increased by 2.6%, operating profit was $33.5 million and that compares to a loss of $12.7 million in 2008 which included a restructuring charge of $11.4 million. The operating margin was 6.4% including restructuring charges of $11.6 million. The operating margin for 2009 was 11.6% excluding the restructuring charges the operating margin was 12%.

In 2009 Education has been a tale of two markets, a steady decline in the elementary-high school sales and growth in the US College and university market. As this bar chart shows, revenues started improving in the el-hi market in September and kept growing in October and November. While we don’t have AAP figures for December we expect to see another increase in sales.

Despite the recent gains, industry revenue will be down about 15% in 2009, far better than the previous expectations of a decline of 20% or more. In this challenging environment we still captured 30% of total available dollars in the State New Adoption Market which will close out the year in the $500 to $510 million range. That’s about a 50% decline, by the way, from the 2008 State New Adoption Market. We also won a 30% market share in 2008.

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