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The McGraw-Hill Companies, Inc. (MHP)

Q2 2010 Earnings Call Transcript

July 23, 2010 8:30 am ET

Executives

Don Rubin – SVP, IR

Terry McGraw – Chairman, President and CEO

Bob Bahash – EVP and CFO

Analysts

Brian Shipman – Jefferies

Sloan Bohlen – Goldman Sachs

Craig Huber – Access 342

Peter Appert – Piper Jaffray

Michael Meltz – JPMorgan

William Bird – Bank of America/Merrill Lynch

Doug Arthur – Evercore

Ed Atorino – Benchmark

Presentation

Operator

Good morning and welcome to The McGraw-Hill Companies second quarter 2010 earnings call. I’d like to inform you the call is being recorded for broadcast and that all participants are on a listen-only mode. We will open the conference to questions-and-answers after the presentation and instructions will follow at that time.

To access the webcast and slides, go to www.mcgraw-hill.com, and click on the link for the Earnings Announcement Conference Call. At the bottom of the webcast page are three links. If you are listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select either Windows Media or Real Player. (Operator instructions)

I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Don Rubin

Thank you and good morning. I am pleased to have everyone joining us this morning for the McGraw-Hill Companies second quarter 2010 earnings call.

I’m Donald Rubin, Senior Vice President of Investor Relations for 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 results. We trust you’ve all had a chance to review the release. If you need a copy of it 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 cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission.

We’re aware that we do have some media representatives with us today on the call. However, this call is for investors and we would ask that you direct questions from the media to Mr. Jason Feuchtwanger in our New York office at 212-512-3151 subsequent to the call.

Today’s update will last approximately an hour. After our 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

Okay. Thank you very much Don and good morning everyone. Again, welcome to our review of the second quarter earnings and our outlook for the year. With me today, as Don said, is Bob Bahash, Executive Vice President and Chief Financial Officer.

I will review the second quarter results and the guidance, Bob will then provide an in-depth look at our financials and after the formal presentation, again, as Don said, we will be pleased to answer any questions or take any comments that you have about the McGraw-Hill Companies.

Earlier this morning, we reported diluted earnings per share of $0.61 for the second quarter. That’s an increase of 17.3% compared to $0.52 last year. Of course, the $0.52 last year included a total $0.06 for a net restructuring charge and a loss on a divestiture.

Revenue of $1.5 billion was up 0.6% for the second quarter, but increased 2.7% if you exclude the divestitures of BusinessWeek and Vista Research. In the current environment, regulatory and legal matters are clearly top of mind issues with investors.

So, I will start this morning by reviewing developments in these areas and their impact on Financial Services, but let me say at the outset that regarding financial reform and legal issues, we are very pleased that this period of uncertainty is largely over.

With the signing of Dodd-Frank Act, we have now greater clarity on the new legal and regulatory landscape for credit rating agencies and that again is a welcome development. It reduces some of the uncertainty and gives us a clear picture of the way forward.

From our vantage point, some things are now clear. First, there were no surprises in the legislation. We’ve been at it for some time. Second, we have anticipated the key provisions becoming law for some time. Third, the new legislation calls for greater disclosure, accountability and oversight. These are all actions that we believe will increase confidence in the markets as well as in ratings.

In this period of change, Standard & Poor’s has been investing in systems and processes and people to prepare us to operate effectively in this new regulated environment to produce ratings that are relevant to investors, issuers and other market participants to compete effectively and to comply with regulations in all jurisdictions as well as being able to manage and mitigate risk.

Now, the key to meeting these regulatory requirements is S&P’s QCCR framework. Now, those initials, Q-C-C-R, stand for quality, criteria, compliance and risk.

Over the past few years, S&P has continually strengthened its QCCR framework within each of those four areas; that is, made establishing control groups independent of the ratings business and investing in staff, training, technology and processes around the QCCR function.

Let me elaborate. The ‘Q,’ the quality team uses formulized review procedures to oversee the integrity, quality and transparency of S&P’s ratings. The criteria team oversees the development and approval of criteria for our ratings that would include new and revised economic stress scenarios for the rating criteria to meeting emerging market and regulatory expectations.

In the compliance organization, there are now 50 people helping to monitor that S&P meets regulatory requirements through regular compliance examinations. They also provide training and guidance on policies and guidelines.

Finally, the risk control function is designed to assess various risks that could affect the integrity and quality of the ratings process. Risk control will also assess the feasibility of rating new types of securities.

More global regulation is expected, but our investment in the QCCR framework in recent years has created the foundation that S&P needs to implement the control and compliance function.

In short, not only is S&P well positioned now to deal with the pending changes it has a leveragable framework to deal with the new regulations. Last year S&P spent about $63 million for QCCR related items. In 2010 spending will increase by about $15 million or up to about $78 million.

At the beginning of the year we said we expected a decline of about 100 basis points in the operating margin for financial services. Despite additional cost the operating margin forecast has not changed. It reflects infrastructure investments and new regulatory requirements that we have anticipated.

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