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The McGraw-Hill Companies (MHP)

Q3 2010 Earnings Call

October 26, 2010 8:30 am ET

Executives

Robert Bahash - Chief Financial Officer and Executive Vice President

Harold McGraw - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Donald Rubin - Senior Vice President of Investor Relations

Analysts

Douglas Arthur - Evercore Partners Inc.

Michael Meltz - JP Morgan Chase & Co

Craig Huber -

Peter Appert - Piper Jaffray Companies

Brian Shipman - Jefferies & Company, Inc.

Edward Atorino - The Benchmark Company, LLC

Presentation

Operator

Good morning, and welcome to The McGraw-Hill Companies Third Quarter 2010 Earnings Call. [Operator Instructions] I'd now like to introduce Mr. Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Donald Rubin

Thank you. And good morning, to our global audience, and thank you for joining us for the The McGraw-Hill Companies Third Quarter 2010 Earnings Call. I'm Donald Rubin, Senior Vice President, 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 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. Once again, that's 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 U.S. 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 Jason Feuchtwanger in our New York office at area code (212)512-3151 subsequent to this 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.

Harold McGraw

Okay, thank you very much, Don, and good morning, everyone, and welcome to our review of the third quarter earnings. As Don mentioned with me this morning is Bob Bahash, he's our Executive Vice President and Chief Financial Officer. And I'll start by reviewing the third quarter results and our new guidance on earnings for 2010. After our presentations, obviously, we'll go in any direction you would like and answer any questions or take your comments about The McGraw-Hill Companies and our prospects.

Earlier this morning, we reported a 15% year-over-year increase in diluted earnings per share for the third quarter, earnings per share of $01.23, now that included a $0.02 gain on some divestitures and a $0.01 dilution on the acquisition of TheMarkets.com. Revenue grew by 5.5% in the third quarter, but increased 6.8% if you exclude the divestiture of BusinessWeek. Based on that strong performance in the seasonally most important quarter of the year, we are increasing our guidance for 2010. We now anticipate earnings per share this year in the $2.60 to $2.65 range, and we expect to achieve the high end of that range. The new guidance excludes the one-time gain of $0.02 from divestitures, but does include dilution of $0.02 from acquisitions. There were many contributors to our strong third quarter. We are very pleased to be firing on so many cylinders. This morning, we'll provide the details on how those results were achieved.

Let's begin with the review of the Financial Services segment. The third quarter is normally the slowest each year in the Ratings business, but not this year, when S&P Credit Market Services produced the most revenue in any quarter so far this year. It is also noteworthy that the growth is coming without the benefit of a recovery in the structured finance market and despite a decline in European issuance. Revenue for S&P Credit Market Services in the third quarter increased by 11.1% based on strong performances in domestic markets. Domestic revenue grew about 20.9%. International revenue was up 0.9%. Revenue for S&P Investment Services grew by 6.3%. For Financial Services in the third quarter, revenue grew by 9.5%, including a $7.3 million pretax gain on divestitures. Operating profit increased by 6.6%. The operating margin was 39.2%, and it reflects the pretax gain on the divestitures and increases in incentive compensation, incremental cost for compliance and substantial staff increases overseas, basically and mainly in India and the acquisition of TheMarkets.com. Our revenue growth was driven by increased refinancing activity, the investors search for yield, a robust bank loan market and recovery in the equity market, which benefited S&P Indices.

Spreads, the excess interest rate over treasury bonds is a key factor in the level of issuance volume. The composite spread on speculative grade bonds hit a two-year low at the end of April at 553 basis points and then began widening, but spreads began tightening in September and as our table shows, that trend has continued into October. At S&P Credit Market Services, the global high yield new issue market took off in the third quarter. After a slight decline in new issuance in July compared to the same period last year, the global high yield markets started climbing in August, and kept on climbing in September. The global high yield market has already produced more new issued dollar volume in nine months this year than it has in any previous single year. Companies are taking advantage of falling yields to refinance debt and repair the their balance sheets, as this S&P report shows, more than 2/3 of the high yield volume in the United States went for refinancing in the third quarter and for the year-to-date. High-yield issuers are finding a receptive market as investors search for yield at a time when cash is producing anemic returns. And as banks continue to deleverage, investment grade issuers are also stepping up their activity in the bond market to lock in low yields.

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