McGraw Hill Financial, Inc. (MHFI)

MHFI 
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McGraw Hill Financial (MHFI)

Q4 2013 Earnings Call

February 04, 2014 8:30 am ET

Executives

Robert S. Merritt - Vice President of Investor Relations

Douglas L. Peterson - Chief Executive Officer, President and Director

John F. Callahan - Chief Financial Officer and Executive Vice President

Kenneth M. Vittor - Executive Vice President and General Counsel

Analysts

Hamzah Mazari - Crédit Suisse AG, Research Division

William G. Bird - FBR Capital Markets & Co., Research Division

Craig Huber

Peter P. Appert - Piper Jaffray Companies, Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Douglas M. Arthur - Evercore Partners Inc., Research Division

Manav Patnaik - Barclays Capital, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning, and welcome to McGraw Hill Financial's conference call. I'd like to inform you that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mhfi.com. That's MHFI for McGraw Hill Financial, Inc.com, and click on the link for the fourth quarter earnings webcast. [Operator Instructions]

I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.

Robert S. Merritt

Good morning. Thank you for joining us for McGraw Hill Financial's Fourth Quarter 2013 Earnings Call. Presenting on this morning's call are Doug Peterson, President and CEO; and Jack Callahan, Chief Financial Officer. Also joining us is Ken Vittor, our General Counsel. This morning, we issued a news release with our results. I 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.mhfi.com.

In today's earnings release and during the conference call, we've provided adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.

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-K, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission.

I would also like to call your attention to a recent European regulation. Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and, potentially, the company. We're aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at (212) 512-3151 subsequent to this call.

At this time, I'd like to turn the call over to Doug Peterson. Doug?

Douglas L. Peterson

Thanks, Chip, and good morning, everyone. I'd like to begin this call this morning by summarizing the highlights of what was a truly momentous year for the company. We completed the sale of McGraw-Hill Education in March, probably the most significant change to the portfolio that we could've made. In addition, we sold Aviation Week in August as we continued to prune the portfolio of publishing assets. We launched McGraw Hill Financial with a new name and a new ticker symbol to signify the extraordinary changes taking place at the company. We increased our investment in CRISIL to roughly 68%. CRISIL has proven to be a well-run growth company, and this was an excellent use of non-U.S. cash.

We achieved record revenue from continuing operations and record adjusted diluted EPS for the year, highlighting what a tremendous portfolio of assets this company possesses. Standard & Poor's Ratings Services, S&P Dow Jones Indices and S&P Capital IQ all delivered very strong revenue growth. The company continued its strong commitment to returning cash to shareholders with $1.3 billion in dividends and share repurchases. After exhausting the previous share repurchase authorization, the company announced a new 50 million share repurchase authorization. As you know, Terry McGraw retired as President and CEO after having led this company and served its shareholders so commendably for the past 15 years. Terry, what a tremendous achievement.

As you can see from this slide, earlier this year, we completed the Growth and Value Plan that was announced in 2011. We believe this plan proved to be a considerable success. After shedding over $2 billion of revenue, predominantly from the sale of McGraw-Hill Education, we are a vastly more profitable company with considerably higher adjusted operating margins and lower capital expenditure needs. More importantly, we unlocked value for our shareholders, who've enjoyed a total shareholder return of 140% over the last 2 years.

Now let's turn to our financial performance during the quarter and for the full year 2013. Revenue increased 10% for the year. Adjusted operating profit increased 16%, resulting in a 180-basis-point improvement in margin, and adjusted diluted EPS increased 21%. Fourth quarter revenue tied second quarter revenue as the highest of the year. However, revenue only increased 2% versus the strong fourth quarter of 2012. Impacting the profitability of the quarter was a $26 million noncash impairment charge in S&P Dow Jones Indices and a full year adjusted tax rate that was lower than anticipated. Jack will elaborate on these and all of our financials momentarily.

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