標普全球 (SPGI) 2002 Q1 法說會逐字稿

At this time, I'd like to inform you that the call is being recorded for broadcast. And that all participants are in listen only mode. At the request of the company, we'll open the conference to questions and answers after the presentation and instructions will follow at that time. To enhance the call, for today's telephone participants, McGraw-Hill has made the presenter slides available on the Internet. To do that, go to http://connect2.worldcom.com. I will repeat it once more for those who would like to view the presenter slides on-line.

connect 2.worldcom.com You will be prompted to enter your name. The conference id, 3857353. The pass word is McGraw-Hill all caps with a space in between McGraw and Hill. This call is also being simultaneously webcast from McGraw-Hill's Investor Relations website and will be available for replay about two hours of after this meeting end both by phone and on the web. If you need assistance at any time including having your volume adjusted higher or lower, press star and zero and I'll assist you momentarily. I will now turn the turn the conference over to Donald Rubin, Vice President Investor Relation of the McGraw Hill Company. You may begin.

Thank you and good morning and thank everyone for joining us today. Both here and abroad for our McGraw-Hill and here at McGraw-Gill and on the conference call. [INAUDIBLE] with me this morning is Terry Mcgraw. And Bob Bahash. This morning, we issued a news release with our 1st quarter 2002 results. We trust you all have had a chance to review the release. If you need a copy of the release and the financial schedules, they can be downloaded at www.mcgrawhill.com/investor_relations. That's www.mcgraw.com/investor_relations. 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 1985 including projections, estimates and description of future events. Any such statements are based on current expectations and currents economic conditions and are subject to risk and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements and in this regard, we direct listeners to the discuss [INAUDIBLE] statements and other periodic reports filed with the security exchange commission. We do have some media listeners on the call. However this meeting is for investors. Today's update will last approximately an hour. After our presentation, we'll open a meeting to questions. It's now my pleasure to introduce the Chairman and President and CEO of the company, Terry McGraw.

Okay. Thank you very much Don and good morning to everyone. It's nice of you to be here. And a nice welcome to all of those listening by webcast or by phone. I'll discuss the operation and then Bob Bahash will be talking about our financials and when that is done, we'll open it up to questions and we'll go in any direction you like. It's always a good start to a new earning season by beating expectations even though the 1st quarter is by far the smallest each year because of our increased investment on the education side and the seasonality of that market. In the 1st quarter last year, we reported 8 cent. Excluding a one time gain of two cents from the sale of real estate. So we're focused on the 10 cents this year a 25% increase.With a smallest quarter of the year now in the bank our guidance is unchanged. And talk a little bit about how we produced these results in the first quarter and because a 1st quarter is really a financial services quarter, let's begin there. For financial services a solid start to the year. The key here was a solid performance by Standard and Poors Credit Market Services which produced double digit top and bottom line gains. There is some concern on the street earlier in the year because of the week new issue volume in the corporate market. A weaker market was factored into our forecast. All of the speculation about a weaker market seemed to overlook the strength in the structured finance market as well as the public finance market. The structure finance market is very much a global business so it contributed to our growth both here and abroad. Looking ahead, we expect more growth. The structured market will continue to grow offsetting softness in corp rates. Issuance in the mortgage back area look strong due to low rates and financing. There is a good pipeline in the asset backed market and we say see a more active corporate issuance. The growth in our index alert businesses were factors. We made progress in building our global index businesses this year. We've signed agreement with two more exchanges. To acquire and manage their index businesses. In February, [INAUDIBLE] launched fund based on the s & p. The fund are traded. By the end of March there was approximately $154 million. The it's also traded on the a next and had probable $750 million and [INAUDIBLE] Global Investor manages that fund. Assets under management and funds based on S & P indexes increases 30.1% to $51.5 billion. We've had a lot of success with the future's contract based on the S & P 500. But the growth of the S & P 500 made the contract expensive first smaller institutions in respond. The [INAUDIBLE] was created. It's only 20% of the size of the S & P 500 contract. On April 20th, [INAUDIBLE] it set a volume record of 417,000 contracts. At the current pace it may trade over 60 million contracts this year. Which would be a 50% increase over last year and more than three times the total traded in the year 2000. These companies and sectors representing 122 industries are now incorporated in all of indexes and you can assess these database over the web through GICS direct. We've also added to our line up. Last week Van Campen launched the S & P corp portfolio. And that's strong and growing relationship there and Paine Webber just introduced the S & P portfolio. Currently there are more than 20 with about 8 billion under management. Summing up for the financial services side strong growth in ratings in their and overseas. Continued strength in the structured finance market as well as in the municipal market. Improving outlook for corporate issuance. Improvement in investment services and more expansion of our index service us. Let's turn to the education market. Revenues declined 8.5%. And the operating loss increased to 24.2% and typically the results in the 1st quarter are not very meaningful in the education business since we're gearing up for orders in the spring and summer months. There are a couple of factors this year that influenced our results in the 1st quarter. First, our college and university business had a solid 1st quarter reflecting the carry through from last year's success. The business and economic's line was particularly strong some of the best sellers include the 15th edition of what [INAUDIBLE] The 16th edition of Garrison's Managerial Accounting and the 10th edition of Schiller's Economy Today. Course management tools and other digital solutions are creating a better value proposition for students and instructors and we continues to add to our capabilities here. We're also increasing our use of artificial intelligence. Alex, the success on-line program first introduced in math and we were talking about how this year we wanted to expand that into other disciplines. The second factor was the affect of early ordering last year in the elementary high school market. This year, the opportunities in the adoption states are not as great as they were last year make the year over year comparisons tougher. That's why we're experiencing a slower start to 2002. Now we know there is also concern that the new Federal funds will be used to supplant state spending instead of supplementing new programs and we also know that the department of education is telling states officials that the new funds are for new programs and will be auditing. To follow the money the department of education is going to ask states to report on currents spending programs and how they plan to spend the new fund as they are applying for. The department of education also plans to monitor programs once the grants have been issued. To build support for the No Child Left Behind Act, Secretary Page earlier this month embarked on a grassroots campaign that will take him to 25 cities across the nation. The department of education is creating new resources to help educate the public on what to expect from HR 1. There is a new website and a new telephone number toll free telephone number so that one can gauge what is happening with those Federal funds and let me give those to you. The web site is www.nochildleftbehind.gov. And the telephone number 1-888-814-NCLB. So that's the telephone number and website that you can monitor with the department of education how those resources are coming out. Last week, secretary page also released grants applications for the programs for school officers. If the appear application is submitted by May 29th, states can start receiving funds by July 1st. We believe some of the big state's already have plans in place so we will be watching this carefully and as you know there is a $900 million authorization for the reading program in this fiscal year. With all of the pressure off state budget this year, we still expect funding for educational materials to increase. Education remains a priority and material actually results a very small portion of the over all budget. We know that 46 states operate on a July through June fiscal year. Meaning that the obviously that the April 1st to June 30th period is the final quarter in the 2002 fiscal year. The latter of which will be more important to us this year.We have three horses in that race. Along with SRA open court -- program and SRA's direct instruction in the reading remedial area. The new emphasis is testing is also creating new opportunities to serve as an advisor to state and local school districts. And to expand its base. And CTB opened nearly 300 new accounts on this system in just three weeks. Next month, CTB will be introducing an on-line assessment system and later this year an electronic system for scoring essays. We're always on the lookout for technology solutions that enhance teaching and learning. That's why we just acquired the reality based learning company last week. It's internet based reading software will enhance the open court program. Teachers can use the newly acquired on-line program for standards correlated instruction and be able to monitor student performance. Our professional and international operations are off to a slower start due to the softer economic conditions but also in part because of the success we enjoyed last year in the 1st quarter with the publication of the 15th edition of Harrison's Principles of Internal Medicine. We expect to get a lift in the 2nd quarter from another publication, the Encyclopedia of Science and Technology also introducing this month Harrison's On Hand. The service offers basic and navigating features. Okay. Summing up for education, our higher education business is off to a terrific start and we like prospects. In a slower year for [INAUDIBLE] publishing, the prospects for our testing business look good.Off the be profits were up 12.5%. The impact of AirSoft advertising market is evidence but so is the strength in our [INAUDIBLE] calls. Business week ad pages were off 33.4% in the 1st quarter with one less issue than last year. The AG count is improving. After five issues in April, ad pages were off only 17% year to date through issue of April 22nd. Business week is off 28%. Broadcasting was [INAUDIBLE] was also off but pacing for the 2nd quarter is now improving. Off in the low single digit neighborhood and June looks like the first positive month for pacing so far this year. At this time, [INAUDIBLE] this team has done a very good job in terms of managing its cost. We estimate that 2002 expenses for our broadcasting operations won't go above the same level that we reported in 1993. We've been closing down plan rooms. They are localize the facilities to give [INAUDIBLE] customers an opportunity to review hard copies of plans. At the end of 1999, we had 160 plan rooms. By the end of the quarter this year we had reduced that to 108 and this will continue as more and more of our customers receive their information on an on-line capability. [INAUDIBLE] our energy service produced solid gains. We're also making headway with the energy services acquired from FT Energy and Aviation Week. In the health care group both experienced softness in their advertising markets. Summing up, we'll continue to maintain tight cost controls, prospects for our partnerships based services continue to improve. Well, an advertise petition a second half pick up in advertising and we're starting to see signs of that most notedly in the broadcasting. We expect to benefit from a second half recovery in advertising. Okay. That is a walk through the results for the first quarter. Very strong financial services quarter and good cost of controls as we start to see issues on the other side starting to pick up. To get more let me turn it over to Bob. Bob Bahash our Chief Financial Officer.

Thank you, Terry and good morning. I'd like to start with an observation. We continue to maintain a strong financial position also. That's [INAUDIBLE] hallmark for a long [time] and we think it's an [INAUDIBLE] tribute more investors will find of value. And stood at $1 billion $85 million at the end of the 1st quarter.It's fully backed. Now in addition we have available $250 million of extend able commercial notes. However none were outstanding at the end of the 1st quarter.Barring] increases each year and then starts to come down in the fourth. Pre-publication cost were $34.9 million. We expect spending for education and professional titles to increase during during the year. For 2002, we expect expenditures in the $300 million. Which is still below the $117 million we spent last year.We expect to end the year near [$280] million. [De-preparation] was $23.7 million in the 1st quarter and we expect to end the year at approximately $100 million. About 9.6 million from McGraw-Hill Education. $3.6 million for financial service and $840,000 for Information and Media Service. The pre-tax adjustments will be $56.6 million. 25% to financial service. Let's spend a minute on the dividend and share buybacks. It represents a compounds annual growth rate of 10.5%. The corporation has paid a dividend every year since 1937. We've been buying back shares in 1996. Through dividends and share repurchases, the corporation has returned more than $1.7 billion for a growth rate of 13 about the 85%. We'll continue to buy back shares. We did not buy back in any in the 1st quarter. Thank you and now back to Terry.

Okay. Thank you, Bob and there we have it. Again, the 1st quarter is very much in keeping with the way that we've been talking about at the end of last year coming into this year in terms of what we expected and I think it's unfolding that way and we're pleased with that position. 1st quarter obviously is a small quarter for us and due to seasonal nature but things are falling into place there. Nonetheless I'm proud of the fact that given the kind of activity and how we've paid for some of our acquisitions and the like that we're providing shareholders with a benefit. Rather than the opposite and so again I think that's some of the financial management issues that we take very seriously. Okay. Let's open it up and Don, if you take us through that.

Thank you. Just a couple of instructions for our guest here in the meeting. Please use the microphone when asking your questions so that our telephone participants can also hear the question. Please be sure to state your name and company affiliation. You may signal Sam when you have a question. Sam is standing in the back of the room. For our telephone participants, please press star one to indicate you wish to enter the queue to ask a question. To cancel or withdraw, press star 2. If you've been listening through a speaker phone but would now like to ask a question, we ask that you lift your hand set prior to pressing star one and remain on the hand set until your question has been answered. That will ensure better sound quality. We'll start with the questions in the room if there are any. First question.

Good morning.

Yes, Lee, as Terry said earlier, the double digit is exclusive of the 18 cents. You would started with your base of 245 and then at on top of that the 18 cents. We're not take thanking into consideration. Okay.

Thank you. Could you walk us through?

Sure. Both the asset backed side as well as the mortgage backed side are doing extremely well. We're also benefiting nicely from the bank loan market.As a lot of loans are coming off the books and being secured. So we're benefiting from that side of it. A lot more emphasis by individual investors and therefore the exchange traded fund phenomena is really starting to take hold. But also in terms of developing relationships with the various exchanges and the [INAUDIBLE] met with the one that we just recently signed there. We're very encouraged there and strengthening that. We are continuing for Standard and Poors to put [Moran] list in local [INAUDIBLE] in markets there and building out on that network and well will be consolidating all of that into next year in our new facility which is still under construction.

And we think it's a ready market to continue to focus on.

Thank you. This question comes from Lauren Fine. From Merrill Lynch. You may ask your question.

Thank you. I've got two questions. A simple one. You had some closures and divestitures and what impact that might have had.

That's a 1 percentage points reduction from last year's rate of 38.5% and it's driven almost entirely by the elimination of the goodwill from our financial statements which in large part were non deductible. Second, relating to restructuring charge. As we indicated back at the time we took the restructuring charge we pointed out that there would be significant benefits with the regard to the downsizing related to 925 positions as well as the elimination of certain businesses but we've declined to break out the particular benefits not only for the year but by the quarter.

And then one last question.

Good morning, Lauren. No. I think that they have gone in a direction in terms of getting after some strong others capability. We ourselves are very much involved in that area in terms of risk solutions. Here and we continue to be very interested in that market as well. But I don't see any competitive advantage or disadvantage at this point.

Great. Thank you very much.

This question comes from Bill Bird of Solomon Smith Barney.

Yeah. Thank you a lot. Could you give us any information, Terry, on state educational patterns this year and second, could you talk about your preliminary view on '03 specifically do you think '03 will see any growth in adoption spending? Thank you.

Okay. Morning Bill. State spending as we said is still a little bit bit of a wild card. With 46 states that are completing this quarter, and their fiscal year. Some of those budgets have still yet to be finalized. We have said that throughout the 1st quarter that our best guess is that l high over all is going to grow somewhere in that 0-4% range and my guess is that we can see a little bit of reduction on state spending but still I believe it's going to be positive. Instead of maybe the 3.7 that we were looking at maybe it's closer to 2 or better than two. So we're watching that one carefully. I still think it's going to be positive growth. Over all and certainly in terms of the priorities associated with education and the political ram indication in the larger states. I do not see major impacts on that. There is math in three states. Social studies will be very big next year. On that one and then there will be some smaller adoption in the Language Arts and in the health. Which will be in four states. And literature in three states as well. So I think it's going to be a better adoption year. Than the '02 but it will not be as strong as the '01 was. It will put increased emphasis on remedial and intervention materials. It will also and put a lot more emphasis off open territories and being able to sell in those kind of marketplaces therefore making sure that you put the [INAUDIBLE] what empathize on yourself is going to be a very important part. '03 is going to be a little bit richer than '02. And open territories and supplement tree publishing are going to be very important as well.

We continue to look at that. And Bob Bahash continues to monitor all of the relationships that we have that way. At this point we have no plans to do that. But again, weld to have watch all of the current environmental factors and take those into accounts but at this point, we're very comfortable with our existing position. Do you want to add anything on that?

No. I think that's pretty much it, Terry. We're looking at all of our opposite all the time. We may at some points in time look to go short-term and swap back into a floating rate but we continue to look at it.

Thank you.

This question comes from Douglas Arthur of Morgan Stanley.

Two questions.

You're fading out.

Can you hear me?

I got the first question.

Okay. I'll let you have the latter one, Bob. Double digit. CBC is off to a very good start with us from the standpoint of the integration into the system. Very pleased with that. They have a little softer start to the year than we anticipated due to the softness in some of the MNA activity. If that changes, that will benefit but they are also doing a terrific job in terms of valuations of goodwill impairments and so they have got a very strong start that way. So it's very early on into the year. But the CBC is taking shape nicely. Bob, you want the talk about the broadcasting.

We're having a little telephone problem. Doug, are you there? Are we okay? Bob, do you want to go back on that one again?

Back on broadcasting with the regard to the softness we experienced.

Okay. You can hear me now?

Yep.

And I'm sorry on the finance services, I was more aimed on revenues. Is it fair to say the under lying revenues with up 4% to 5% [INAUDIBLE]?

Right.

Thank you. The next question is from Kevin Brunik of [INAUDIBLE].

Understanding that it's a seasonably slow period, I think they may feel dilutional. Could you [INAUDIBLE] the two or three components that drove profits up?

Good morning. On Tribune... Tribune, now of course have been been in our operating results for 2001 there no additional dilution from Tribune or Schafer in 2002.

And Kevin on the investment services side, as you know with the elimination last year of of some properties, on that side and a shift to more of the index portfolio management services capability, revenues were off on a comparison basis but operating profits going to higher margin capabilities is what the game plan has been. But we're also seeing the success that we've been having in the roll out of the index service it's again those are very much higher margin businesses and you'll see that and hopefully it will continues.

Thank you.

The next question comes from Steve Barlow of Prudential Securities.

Good morning. Can you give us an idea of what maybe the head count was down and maybe what salary and wages were down. And the same question on the education side. There were a lot of heads out there. Just one component of the cost but if you can help us on that as well. Thank you.

Good morning, Steve. On the first one in terms of Information Media Services. You still [INAUDIBLE] one of the things that we talked about coming into 2002 is we wanted to have a base that was a much more in keeping with the kind of environment that we were anticipating and we took those initiatives. As you know last year we reduced the head counts of business week by 17%. Same thing on the broadcasting side. Until we are very much convinced that the advertising turn around is showing itself. I would say also that in terms of the advanced bookings now into may and June, we're starting to see some real pick up there. Now we want to make sure that all translates and whatever. But this is exactly where we thought we would start to see it. And we're getting it from some of the telecommunications, the financial service and industrial materials coming back strong. Some auto on that one. What we want to see as we get into the second half is where some of the technology comes in. And we expect that to be somewhere in the second half to show some rebound on that side. Comparisons are also going to get easier that way as well. On the education side, again with the elementary and high school side being a very changed picture for us, as you know 40% of our business comes from the supplementary side as well as as the testing area and we've been able to focus very much on very important markets us to. The intervention market and remedial markets but using capabilities from both the school and Glenco and some of the [INAUDIBLE] operations so that is at this points also very tight. But we're fully investing in a lot of technology transformation issues like the one I mentioned with Alex and so forth.

I'm going to ask it a different way? You've tight ends the cost but to me it doesn't appear as reflected in the numbers quite yet of the revenues are in a tough environment right now but yet the offering profit keeps going down.

You'll see that play out throughout the course of the year. But Bob, if you want to take that?

Yeah.

Have we seen that in education yet?

Yes, we have as well.

Again, Steve, that will continue to build throughout throughout the course of the year.

Thank you.

The next question comes from Brandon Dobell.

Good morning. Maybe give an update relative to to your target and what kind of things need to change to get that up to your target.

And the first one on the college market. The college market is a market that is extremely attractive. It's got favorable demographics and rising enrollments and it's one in terms that we have a been focused on in developing. The market last year grew about 5% and we grew double digit and we expect to dot same thing this year. And again we're looking at industry growth around the 5% level. And we fully expect to take share. And grow it at a double digit rate at the same time, it's a very [exciting] market in terms of a lot of the technology transformation. One of our core capabilities has been the development of this technology capability that allows students as well as instructors to be able to have this access to the materials in the same way of being able to do assessment and other kinds of supplementary issues and it's called Power Web and that's going nicely. So we'll continue to be very aggressive on this market and it's an area that we think is going to be attract activity. We certainly pushed that way both in terms of construction [plats] and well as the aviation markets. You've also seen it in the professional book group. And with programs like access science and access medicine. Where we've taken our leading positions and large prints text like the encyclopedia of Science and turned those into sub-description based service. It's a little bit different on the other side. Here is where we can develop the solution packages. You can couple a lot of different types of information especially [INAUDIBLE] into a [INAUDIBLE] capability. Of the insight programs at s & p 500 as well. The Advice Erin-side and Research Erin-side.

Maybe one quick follow up on the college market. Any particular pockets of strength or weakness that you're seeing either at the regular under graduate level?

No. We got started nicely with the business and economics area but the humanities as well. So we're [INAUDIBLE] it's right across the board and we feel very good about this market.

Okay. Thanks.

The next question comes from Peter Appert.

Good morning. Hoping you could follow up. Give us a sense of whether you're comfortable with progress being made and whether we're seeing year to year improvement in the operating results?

Yeah. Good morning. We fully expect them to participate nicely this year. Showing good growth. Again, the intervention and remedial markets are very important here. So we expect this to be a good year. Again remember supplement tree is faster growing and certainly higher margin therefore building off of that kind of base gives us broader capability but also improved expectations.

And then, Terry, unrelated item, in the K-12 business I think there have been some reports that folks at Hard Corp have been aggressive from a competitive standpoint. Could you speak to that and more broadly to what you're seeing in terms of the competitive environment.

I won't talk about any other competitors but I would say this. And as we said before, I think that we have a much, much healthier environment. And I think with some of the change and some of the expectation is that it's going to be a more competitive, more aggressive and I think it is. And I think that that's good. I think one of the things that was absent going back two decades was stronger competition and competition is good. It's going to help bring some of the changes that we need in our classroom and the and on the only there but in terms of things that influencing the classroom like teacher training. So it's a healthier, more aggressive and it's a more competitive environment and we like that a lot and I think that speaks well for the business.

Yes. Again our expectations here in the K-12 market is obviously the growth we think is going to be positive but our expectation is to grow faster than that and that's because of the supplementary and testing capabilities.

The next question comes from Brian Shipman.

Thank you and good morning.

Good morning.It's very much reflective of what we've been saying in terms of the diversification strategy and our ability to participate in lots of different markets and have offsets in all of that. And as it continues to grow faster than we are domestically. But what the rest of the year from a margin level, I'll hold to my 30% on that one. But clearly, Brian, our expectation is to continue to build. On our capabilities there and get higher returns, higher margin. As you know if you stop some of the investment, you can ramp those up quickly but given the opportunities that we have, we think it makes good sense to continue to invest and make some of those kind of changes. But it's a healthy environment. As far as the television stations go, I was obviously very encouraged by some of the Fcc action. And I think it's a little late but anything that makes it a less regulated market, I think is beneficial. And we continue to monitor those situations. Look at our opportunity. I'm very placed that we're starting to see some change at broadcasting. Some positive signs. We have very strong positions in particular in Denver and San Diego. And we're committed to those properties. But having said that, we think it's a very attractive environment and we continue to always look at all of the assets within the business portfolio and there is no change.

Yeah. Again, you know, we're really early on into the year from an environment standpoint and there is a lot of issues there. And we are -- I'm committed to double digit top and bottom line at standard and poors and we'll just have to see as the year unfolds. And given some of the changes I said earlier in terms of the shift on the investment services, my hope would be that we could continue to expect improvement there.

Okay. Thanks.

You bet.

Well now our final question from Andrew Gordon Brown of JP Morgan.

Good afternoon.

Hi, Andrew.

Just a quick questioning on the testing market have you done any work following the provision of the Bush Bill. As to how big the testing market will be on a 3-5 year basis. How much bigger will it be than now?

Well, I think that beyond the Bush Education Bill, the testing market is one that's experienced some very nice growth and that will continue. Again our exposure right now in terms of developing out statewide relationships, I believe our number is 22, Don is that correct? We're in 22 different states and that gives us obvious further expansion there as the whole assessment capability becomes increasingly more important as part of the whole standards base reform. So we're very early on in a lot of the actual playing out. And so our expectations for testing are quite favorable. In terms of putting a 3-5 year number out there we've been growing at very healthy rates. And we expect that to continue for some time.

Thank you very much.

You bet.

That concludes this morning's call. On behalf of the McGraw-Hill companies, we thank you for participating and wish you a good day.