標普全球 (SPGI) 2009 Q4 法說會逐字稿

Good morning and welcome to The McGraw-Hill Companies fourth quarter and full year 2009 earnings call. I would like to inform you that the call is being recorded for broadcast and that all participants are in 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 site, go to www.McGraw-Hill.com and click on the link for earnings announcement for its conference call. At the bottom of the webcast page are three links click on Windows or Real Media, if you want to access the slides and audio on your computer, if you only want to view the slides and plan to remain on the telephone, click the third link with the telephone icon. (Operator Instructions)

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

Thank you. 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 Company. With me 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 results. We trust you have 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 their 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 Weis at our New York office at area code 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 my pleasure to introduce the Chairman, President and CEO of The McGraw-Hill Companies, Terry McGraw.

Okay. Thank you, Don, and good morning everyone and 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 will be pleased to address any comments or questions about the McGraw Hill Companies that you may have. Let's get started.

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 pretax gain of $10.5 million or $0.02 on the divestiture of BusinessWeek in December. That compares with $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 marked the first quarterly increases in diluted earnings per share and revenue for The McGraw-Hill Companies since the third quarter of 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 are encouraged by the improvement in the economy which has finally begun to recover albeit 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 Board in 2007. We have now increased the dividend annually for 37 consecutive years. Since 1974, the dividend has grown at 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 buy backs.

Okay, with that as an overview let's take a closer look at our operations and the prospects for 2010 and we will 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; of steady decline in the elementary high school sales and growth in the U.S. college and university market. As this bar chart shows revenue started improving in the el-hi market in September and kept growing in October and November. And 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 million to $510 million range. That's about a 50% decline by the way from the 2008 state new adoption market and we also won a 30% market share in 2008.

In the fourth quarter, state allocations that reached local districts later than usual in some regions together with the arrival of some federal stimulus funds helped produce the pick up in ordering. We caught the wave with our basal products and our intervention programs which benefited from the incremental Title 1 and IDEA funding for disadvantaged and special education students respectively provided in the stimulus package.

These gains were offset by a substantial decline in testing. The result was 7.6%, decrease in fourth quarter revenue for The McGraw Hill school education group. The major region for the decline was testing, and was the managed phase out of the statewide summative contracts in Arizona, California and Florida as part of a more selective approach to the custom testing market. In rebalancing the testing balance, we're increasing our focus on the expanding formative market and the noncustom or off the shelf market while decreasing our emphasis on lower margin custom contracts. We continue to win summative contracts with a selective bidding strategy. In the fourth quarter we were awarded contracts in North Dakota, Alabama, Indiana, and New York State.

Acuity which is our formative testing program continues to show solid growth retaining existing subscription customers and adding new ones. New York City, the largest school district in the nation is now in the third year of its Acuity contract, and Philadelphia has signed on for the start of the new school year. These are multiyear, multimillion dollars contracts. Many district level opportunities for the new business are in the pipeline for 2010. Some states have also included the introduction or the expanded use of Acuity in their applications for the federal race to the top funding.

Growth in the el-hi market hinges on substantial increase in state new adoption opportunities. We estimate that the state new adoption market this year will be in the $925 million to the $975 million range. Given state budget pressures we expect industry sales in the open territory to decline in 2010. We also expect a decline in residual sales in the adoption stage, which usually fall off at a strong state new adoption year. Given the strength of the state new adoption schedule we think the el-hi market could grow in the 6% to 7% range a off of 2009's low base.

Texas and Florida of course are the key adoption states in 2010. And we are well positioned in both. The Florida legislative session starts in March. Senate and house leaders have given early indications of full support for funding K-12 instructional materials. Math is schedule to buy K-12 math this year. The state recently adopted new math standards which essentially is obsolete books now in the classroom. Adoption activity in Florida is already very brisk at the district level, something we did not see at this time last year when the state still planned to buy literature. Texas returns to the market this year with funding already in place for a K-12 reading and literature adoption. The state legislature has appropriated $465 million for the adoption. We continue to see evidence of pent up demand in the market, but budget pressures remain until the economic recovery is further along.

We may also see some purchasing postponed from 2009 in adoption states like California. Funding levels in California remain uncertain but some districts may buy K-8 reading programs as part of the second year of that adoption. There also is potential for math sales at the middle school that's grade 6 through 8 and high school, grades 9 through 12. The governor's budget proposal for the 2010, 2011 fiscal year, calls for $332.5 million for instructional materials, which is flat with 2009. We are following this situation closely and will keep you updated on the developments there.

A solid 2009 performance in higher education culminated with a surge in second semester ordering late in the year. We don't have the final 2009 figures but it now appears that the industry is going to outstrip our 8% to 10% growth estimate. Revenue in the fourth quarter at our higher education professional and international group grew by 7.5%. We expect the US college market to grow in the 5% to 7% range in 2010. A surge in enrollment helped drive industry growth in 2009, and is going to do so again in 2010, although probably not at the same pace. Based on a number of surveys and reports we estimate the most rapid rate of growth was concentrated in 2 year colleges and career colleges. We saw the benefits in career education; it was the fastest growing imprint in our higher education line up in 2009.

All our major imprints grew in 2009 and are expected to do so again in 2010. Fourth quarter and full year digital sales increased at double digit rates. That includes eBooks, online courses and on line study tools for students including McGraw Hill Connect, the industry's most advanced interactive platform. There is clearly acceleration in the pace of integrating content, technology and distribution, and we will take full advantage of the rapidly evolving digital opportunity. There is growing momentum in the eBook market as evidenced by the almost daily announcement of new devices and new formats. We will continue to look for optimal ways to deliver data and source files for each of these devices and in the near future you will undoubtedly see a McGraw Hill eBook for the college market running on an Apple tablet.

All our titles on CourseSmart the industry ebook consortium are already available to students on an iPhone operating system. That's because CourseSmart developed an iPhone application last summer with the support from Apple. The goal was to have core educational content available on the iPhone operating system which also makes it possible for eBooks to run on new Apple devices using that system such as the tablet.

Consider the Apple tablet computer which will be introduced shortly. There is a lot of secrecy about the introduction, but many expect the Apple device will use the iPhone operating system. If that's the case, and we believe it is, we are confident that our CourseSmart eBooks should run well, right out of the box on any Apple tablet. Stay tuned.

I should also point out that CourseSmart does not share revenue with Apple. For a student to access our eBooks they must subscribe to CourseSmart or its college bookstore partners. The eTextbooks feature the iPhone application and it lets students access our titles on a device that runs on the iPhone operating system. That application is free to subscribers. About 95% of the McGraw Hill higher education current titles are available as eBooks with interactive features including search and note taking functionalities.

Digital publishing is also a bright spot in our professional market with subscriptions to our services growing at a consistent double digit pace. And we continue to innovate in this space.

In the first quarter of 2010 we will launch AccessPhysiotherapy, the sixth vertical or specially site in the AccessMedicine family of online medical information subscription sites. The new specialty offers an excellent opportunity to broaden the market for the respected Access brand, beyond medical education and clinical practice, to the Allied Health field.

Our professional business group will also launch more digital products in the first quarter. Kiss, Bow or Shake Hands is a new subscription-based reference for international business etiquette. Clearly that's a digital product with widespread global appeal. Change is coming rapidly in our markets. Growth in the digital world will be transformational but if prepared it will unlock huge new opportunities. We are not waiting for a tipping point. That means we will continue to ramp up our investments in learning platforms and content management capabilities to stay ahead of the curve in creating the next generation of innovative products and programs. The increase in marketing and sales expenses associated with the robust state new adoption schedule will also put some pressure on operating margins in 2010.

Let's sum up then for The McGraw Hill education. Growth in the key education markets, 6% to 7% increase in the elementary high school market. 5% to 7% growth in the US college and university market. Revenue growth for the segment, 7% to 8% level and operating margins unchanged from 2009.

With that let's go on over to financial services and in financial services, improving conditions in the financial market marked by the narrowing spreads, low interest rates and a growing investor appetite for yield were important factors in a strong finish this year. In the fourth quarter for financial services revenue increased by 10.6%, operating profit grew by 14.6%, and the operating margin was 36.3%. Excluding the loss of the divestiture of Vista Research and the net restructuring charge, the segment's operating margin for the year was 39.4%. This 2009 operating margin also reflects the cost of compliance to meet the increased regulation of Standard & Poor's credit market services. The improvement in 2009 in investment grade industrials and high yield issuance culminated in a 19.4% increase in fourth quarter revenue against the easiest comparisons of the year at Standard & Poor's credit market services.

In the United States we saw 181 industrials issued with a par value of $93 billion, compared to 94 deals with a par value of $78.1 billion in the fourth quarter of 2008. That's a 92.6% increase in the number of issues and a 19% increase in the par value of the issuance. There were 101 high yield industrial and financial institution issues for $44.1 billion in the fourth quarter, compared to 3 for $1.3 billion for the same period in 2008; obviously tremendous improvement.

In Europe the dollar value of industrial issuance was $93.6 billion up 36.9% in the fourth quarter. That represented 154 deals, an increase of 46.7%. And there were 27 high yield deals in the fourth quarter 2009 in Europe, and none in the same period of 2008; obviously a clear pickup. All this activity helped produce a 62.5% increase in the fourth quarter transaction revenue at S&P Credit Market Services. For 2009 transaction revenue was up 0.2% after being down 20.2% for the first six months.

Nontransaction revenue which represented 69.2% of S&P credit market services total revenue in 2009, grew by 6% in the fourth quarter to finish the year at just over $1.2 billion. It was the first quarterly increase in nontransaction revenue in 2009. This continues to be a durable revenue stream. It includes annual and surveillance fees and subscription revenue. If you back out the impact of brokerage fees nontransaction revenue grew by 2% in 2009, instead of the reported decline of 0.6%. We expect growth in 2010 in transaction and nontransaction revenue for S&P credit market services and we expect growth in domestic and international markets in 2010.

The international markets finished strongly in 2009. S&P Credit Market Services' international revenue in the fourth quarter was up 17.7%, and all regions -- Europe, Canada, Asia Pacific, Latin America -- grew in the fourth quarter and provided 49.4% of total revenue. Improving financial market conditions are clearly making a difference in the worldwide outlook for S&P Credit Market Services. Consider the changes in spreads. Spreads to US treasuries, always a key factor in the level of issuance, are continuing to narrow for investment and speculative grade issues. As this table shows since the record highs at the start of 2009, investment in speculative grade spreads have tightened and are near the range of their five year daily moving averages. Spreads continued to tighten in January, another indication of why the month is off to a good start. That's a reflection of optimistic sentiment in the credit market and an expectation of some stabilization in credit quality.

The spread between the three month LIBOR and the Federal Reserve's overnight rate -- this is a key gauge of how banks assess the riskiness of lending to one another, and it is down to 0.25%. We have also seen spread contraction across the major consumer asset backed securities during 2009, and as this table shows the spreads narrowed dramatically in auto, credit cards and student loans. S&P expects further contraction in credit spreads this year.

There are other important favorable trends in the credit markets. There is a strong demand for non-financial institution paper by investors who want to diversify their portfolio. Investors have already demonstrated that they are increasingly comfortable in buying low rated bonds. In the fourth quarter of 2009 60% of speculative grade issuance was rated at single B plus or below. In corporates, the high yield bond market has become more attractive than the leverage loan market and companies with riskier credits are lining up to tap it. Some issuers choose speculative gray bonds because covenants are less restrictive and in some cases maturities are longer.

Because they are widely expected the corporate borrowing costs will increase as the economy improves, some nonfinancial firms are borrowing now to repay expensive debt including commercial paper, as well as bank loans. Some companies are beefing up their balance sheets with an eye on merger and acquisition activity or buying new equipment. The deleveraging of financial institutions is another factor in credit market. As these institutions shrink the liabilities on their balance sheet and tightening lending standards, credit availability is declining systemically. Limited availability of bank loan funding will result in a greater reliance on the primary bond market.

S&P believes that 2010 may offer a window of opportunity for refinancing debt. Refinancing of current and future maturities was robust in 2009 and should be again in 2010. About one-third of the estimated $300 billion coming due in 2010 was refinanced in 2009. Let me repeat that, about a third of the estimated $300 billion coming due in 2010 was refinanced in 2009. There is a dramatic rise in corporate debt coming due from 2011 through 2014. It's estimated to be $2 trillion. Some of that debt may be refinanced in 2010, adding to the remaining $200 billion that is coming due this year.

In public finance, 2009 was a solid year and 2010 looks even better. Municipalities sold the second heaviest volume of debt in 2009 -- $468.3 billion, $468.3 billion. The all time record by the way was $468.4 billion, and that was set in 2007. The biggest factor boosting issuance here was the Building America bonds program which authorized municipalities to sell taxable debt and receive a federal subsidy equal to 35% of their interest costs. Munis sold $84 billion in taxable debt in 2009, about 18% of total issuance.

S&P expects sales of taxable bonds to help drive growth in this market in 2010, although tax exempt securities will continue to comprise the largest share of overall issuance. Lower tax receipts and added expenses for pensions and infrastructure needs should keep state and local government active in this market.

The outlook for structured finance in 2010 remains more problematic with asset backed securities showing the most promise. In the US residential mortgage backed securities market we expect to see a continuation of the re-REMIC activity in 2010, as financial institutions continue to seek ways to improve balance sheet capital requirements. In the commercial mortgage backed securities market we saw a small but marked note of confidence as issuers bought single borrower instruments to market in the fourth quarter of 2009. For the near term, S&P expects very modest pick up in the activity of this part of the market.

The asset backed securities market continues to be a positive story. Volume began to grow last March as the TALF stimulus program took hold. By the end of 2009 there was activity outside of the TALF program. Dollar volume issuance in the US market grew by 179.1% in the fourth quarter of 2009. Although our outlook for the US asset backed securities issuance is relatively flat in 2010, there is a healthy pipeline as we move into the first quarter with a good mix of TALF and non-TALF activity. Tighter spreads have limited the economic incentives for using TALF leverage for many issuers. The collateralized debt obligation market will continue to be soft in 2010.

About 33% of financial services revenue was produced last year by Standard & Poor's investment services. Fourth quarter revenue was down 4.8% in 2009, but was down only 1.7% excluding divestitures. For the full year 2009, revenue declined 4.2%, to $861.9 million, but was off 1.5% if you exclude divestitures. The expiration of the independent equity research settlement in July also was a factor in the fall off in revenue. But in some key markets the year ended strongly. A new high of $247 billion was established at the end of 2009 for assets under management based on S&P indices. The previous high was $235.3 billion, and that was set at the end of 2007. From a small family of equity indices S&P has expanded into commodities, fixed income, real estate, custom, thematic indices. S&P indices have successful relationships with exchanges literally around the world.

At the end of 2009 there were 217 exchange traded funds based on S&P indices, five were added in the fourth quarter and more coming in 2010 and they'll be in the areas of commodities equities, fixed income, and alternative investments. It is our strategic goal to provide an S&P index for every type of investment. And in 2009 S&P introduced 90 new indices. And we expect more new products and more growth from S&P indices in 2010.

In a challenging market Capital IQ added new clients in 2009 to end the year with more than 2900, an increase of 9.9% for the year. Sales to new customers and increases from current customers are expected to produce another year of growth for Capital IQ in 2010. With more growth from S&P indices and Capital IQ we expect revenue to increase in 2010 at S&P investment services. The divestiture of Vista in May of 2009, and the expiration of the research settlement last July will be mitigating factors in the first part of the year.

Let's complete our review of the financial services with a few comments on the current legal and regulatory situation. The regulatory situation is still evolving and we continue to strive for global consistency trying to avoid a patchwork of regulatory framework; this is very, very important. The good news is that we are getting close to the finish line on global regulation. In November the European Union issued its final regulation for credit rating agencies. By next September S&P will need to apply for registration in Europe. Regulations are being developed in Europe by the Committee of European Security Regulators better known as CESR. We are following that process closely. In general the proposed regulations are based on the International Organization of Security Commissions code of conduct, that's IOSCO out of Madrid, and that's a very good thing for them to take the leadership in terms of providing those code of conduct principles.

Starting on January 1, 2010, S&P has been licensed in Australia, to provide its ratings to wholesale investors. We continue to work with regulators in Canada, Japan and India. In the United States, both the House and the Senate continue to consider regulation of the rating agencies as part of the Omnibus financial markets performed legislation. We continue to work with congress on draft legislation. We are somewhat concerned that proposed discriminatory liability standards would create an uneven playing field and have unintended consequences for financial markets. In the legal arena there is not much to report. In the underwriter cases we continue to make applications seeking dismissal and oral arguments have been proceeding in several of them. In the stock drop suits motions to dismiss have been fully briefed and oral arguments have been held in two of these cases. In the state law claim cases we also are making applications or awaiting decisions on motions to dismiss. We are in the discovery phase of the Abu Dhabi case.

Summing up then for financial services in 2010, there will be a return to growth in revenue at S&P Credit Market Services and S&P investment services. The segments' operating profits will grow, but there will be pressure on margins as S&P makes investments in the infrastructure of its business to support future growth and to comply with new regulatory requirements. The majority of these costs support the credit ratings business. They include investments in surveillance systems and the infrastructure for quality, criteria, compliance as well as risk management. We will also continue to invest in key S&P investment services business so that they are well positioned to take advantage of improving market. There is an additional factor -- S&P investment service is primarily subscription based. In a challenging market in 2009, the S&P investment services added fewer net subscribers than in 2008, and that will have some impact on revenue in 2010. Prospects look good for increasing net subscribers this year which will lead to a more favorable impact on revenue in 2011. Revenue for this segment is expected to grow in the high single digits. Operating margins will decline about 100 basis points.

Now let's shift over to information and media. In that area, continued strength in the global energy markets, a soft advertising market and the divestiture of BusinessWeek were major factors in the fourth quarter performance. In the fourth quarter for information in media revenue declined 11.4%, including a pretax gain of $10.5 million from the divestiture of BusinessWeek in December. Operating profit increased 40.6%. However, excluding a pretax gain on the sale of BusinessWeek and a prior year restructuring charge, operating profit declined 6.8%. The operating margin was 18.1, compared to 11.4 in the fourth quarter of 2008.

Reflecting the gain on the sale of BusinessWeek, the operating margin for the year was 9.7% but excluding the gain and the 2009 restructuring charge of $4 million, it was 9%. The weak advertising market and problems in the automotive sector in evident in the 9.5% revenue decline in our Business-to-Business group in the fourth quarter. Revenue for the Broadcasting group was off 26.6% in the fourth quarter, and obviously especially with the absence of political advertising. In 2009, advertising represented approximately 3.5% of total corporation revenue, down from 4% in 2008. Virtually all of it is in this segment. With the sale of BusinessWeek our exposure to the cyclical advertising market will be reduced to approximately 2% in 2010.

Political advertising in the Broadcasting group will be a positive factor in 2010. There are US Senate and House races in Indiana, Colorado, California. There will also races for governor in Colorado, and California, plus spending on issues and propositions. The outlook for political spending on local television stations also got a boost from last week's US Supreme Court decision to remove campaign spending restrictions from corporations. The Broadcasting group also originally renewed its affiliation agreement with ABC. The new agreement will have adverse but immaterial impact on the segment's future revenue and profitability.

With all the reporting on problems of the big 3 auto companies in Detroit it's easy to lose sight of the fact that J.D. Power operates successfully in a recovering global automotive market. Here is a snapshot of J.D. Power's latest forecast for the global market. Global light vehicle sales expected to rise to 65 million units, and that's an increase of 1.6% over 2009, after a decline of 3.1% last year. Growth continues in China, an increasingly important market for J.D. Power. The recovery begins in North America, with volume up 10%, to 13.9 million units in 2010. J.D. Power will also complete the migration of its syndicated study deliverables to an online platform which will reduce cost and improve the quality and the utility of its research data.

The digital transformation of this segment will continue to be a plus in 2010. Business to business digital revenue grew again in 2009, and now represents more than half of the b2b group sales in 2009. In 2008 it was under 50% of the b2b group's revenue.

Platts continues its global expansion strengthening its benchmark status and core commodity market. Platts has launched a series of new oil price benchmarks for Indian markets. In December Platts announced the launch of a new price assessment for the very first Russian petroleum stream that's flowing through the Eastern Siberian Pacific Ocean pipeline for Asian markets. It's an interesting example of how Platts keeps abreast of the developments in this market. The pipeline, rail and port facilities in Russia's Far East provide the country with the logistics to target increasing amounts of oil to Asia rather than to the West. Over time the operation is well positioned to serve the market as a major price indicator of spot oil values in the Far East. The exports are set to grow and the oil has wide equity ownership; key elements for an emerging benchmark.

Summing up then for information and media, the sale of BusinessWeek will impact revenue and operating margin in 2010. Revenue will decline in the middle single digits but excluding $100 million from the BusinessWeek divestiture revenue will increase in the mid single digit range. Operating margins will rebound climbing in to the mid teens.

Okay. That completes our review of the three operating segments and the outlook for the segments in 2010. For The McGraw Hill Companies we expect diluted earnings per share of $2.55 to $2.65 in 2010. Okay.

Let's hold it there and let me turn it over to Bob Bahash and let's get the inside detail on some of the financials.

Thank you, Terry. A major focus during 2009 was our balance sheet management. We did that in order to maintain and enhance our strong financial position to ensure adequate and appropriate access to capital. This morning I want to review how we maintained and improved upon the Corporation's financial strength in 2009. We will also look at our plans for this year 2010. So we start 2010 in a strong financial position. Due to very strong free cash flow we ended 2009 with cash and short-term investments of $1.23 billion. Total debt at year ends was $1.2 billion. This comprised entirely of long-term unsecured senior notes. and there was no commercial paper outstanding at the end of 2009. So, as a result, we are now in a slight positive net cash position versus a net debt position last year of $796 million.

Keeping a tight grip on costs and expenses was a year long priority. Terry has discussed revenues and margins so I will concentrate on providing some additional color on expenses. For purposes of this discussion I'll deal with adjusted expenses which represent reported expenses, adjusted to exclude restructuring charges in both years as well as the loss on the divestiture of Vista and gain on the divestiture of BusinessWeek, Adjusted expenses are shown on exhibit three of the press release.

Despite increases in incentive compensation, consolidated adjusted expenses --- that's segment expense as well as corporate expense -- declined 0.3% in the fourth quarter and 4.7% for the year. Now if you exclude the impact of currency, adjusted expenses declined 3.3% in the fourth quarter, and 3.4% for the full year. Now let's look on a segment basis.

For McGraw-Hill Education, adjusted expenses declined 4.2% in the fourth quarter, and 8.4% for the year. At constant currencies adjusted expenses declined 6.2 in the fourth quarter and 7.3 for the full year. Full year expenses declined despite higher incentive compensation as declining revenue opportunities resulted in lower cost of sales and reduced selling and marketing costs. The segment also benefited from savings from previous restructuring actions. For 2010, we expect McGraw-Hill Education expenses to increase 7% to 8% versus 2009 adjusted expense. Expense growth is driven by an increase in selling and marketing costs given the robust new stated option opportunities that Terry mentioned.

As I have mentioned in the past we incur significant promotion and marketing expense in the first year of a new adoption. Profit contribution increases in the subsequent years from residual sales. Additionally, we are investing in both technology and personnel to support our digital initiatives particularly at higher education and professional in order to provide value and choices for our customers. The expense growth is partially mitigated by savings from our second quarter 2009 action to combine our core basal publishing operations with our alternative basal and supplemental publishing operations.

For financial services adjusted expenses increased 10.3% in the fourth quarter and 1.6% for the full year, but at constant currencies adjusted expense increased 4.1 in the fourth quarter and 3.4 for the full year. The full year expense growth was driven by increases in incentive compensation and compliance costs mitigated by the benefits of restructuring, tight expense control and the impact of divestitures. For 2010, we expect expenses to increases roughly 9% to 10% versus 2009 adjusted expense. Expense growth is largely driven by continuing investments in our fast growing businesses, the carryover impact of 2009 new staff hires and planned new hires in 2010 and additional investment to support our regulatory and compliance efforts.

For the full year 2009 cost related to regulatory and compliance initiatives resulted in approximately $20 million of additional cost versus 2008. Our expense guidance assumes a comparable increase in 2010, though this is obviously highly dependant on the final form of regulation. For information and media adjusted expenses declined 12.1% in the fourth quarter and 8.7% for the full year. At constant currencies adjusted expenses declined 12.7% in the fourth quarter and 7.9% for the full year. Restructuring savings and lower cost of sales due to reduced revenue were key revenues for the full year expense decline. Fourth quarter expense of course benefited from the divestiture of BusinessWeek.

For 2010, reflecting primarily the divestiture of BusinessWeek, the expenses are expected to decline in the low teens versus 2009 adjusted expenses. You will recall from our third quarter call that we expected the BusinessWeek divestiture to benefit 2010 pretax profit by approximately $20 million to $25 million. We refined our estimate now and expect the benefit to be roughly $25 million. Information and Media, the segment I'm referring to now, will actually reflect savings from the BusinessWeek divestiture of $38 million as we manage vacant space and certain other support costs within corporate expense which is increasing by approximately $13 million, due to the divestiture.

As we've indicated on previous calls, Information and Media's 2009 results were negatively impacted by the non-cash accounting impact of converting studies onto Compass, J.D. Power's online reporting and analytical tool. Revenue previously recognized at the time of our syndicated study's release will not be recognized ratably over the 12 month life of the subscription, and this again of course is similar to the suites' transition activity in 2006. For the full year, there was an $11 million decrease in revenue and $7 million decrease in profit due to the impact of Compass. In 2010, we expect all customers to be accessing this digital delivery platform and the impact in 2010 is expected to be similar to 2009. Corporate expense in the fourth quarter was $36.4 million, a $7.4 million increase versus the previous year excluding the 2008 restructuring charge. The increase was primarily driven by a $10.3 million increase in incentive compensation. For the year excluding the 2008 restructuring charge expenses were up $21 million, driven by a $23 million increase in incentive compensation.

For 2010, we expect corporate expense to increase $25 million to $30 million. The primary reason for the increase is driven by higher excess space in New York resulting from the BusinessWeek divestiture as well as excess space generated from the restructuring actions at McGraw Hill Education. Incentive compensation has increased in previous quarters and again in the fourth quarter when compared to a depressed 2008.

Incentive compensation increased by $96 million for the full year 2009 at approximately $57 million in the fourth quarter driven primarily by stronger than anticipated results and reversals taken in accruals in the previous year. For 2010, incentive compensation should now grow in normal patterns with projected performance. However, stock based compensation is expected to reach $50 million, compared to $22.3 million in 2009, and that's due to the 3 year earning and vesting period, which is off, of course, a depressed base.

Foreign exchange had a significant impact on our operating results in 2009. For nine months foreign exchange decreased revenue and expense but had a minimal impact on profits. In the fourth quarter, the trend reversed, benefiting revenue by almost $26 million while increasing expenses by $36 million, resulting in operating profits declining by about $10.5 million. For the year, foreign exchange decreased revenue by $70.4 million and expense by almost $61 million, resulting in a decline in operating profit of $9.5 million.

Prudent management of investments and tight cost controls contributed to a strong free cash flow performance. For the year, free cash flow was $770 million compared to $503 million in 2008. We define free cash flow in the following manner. We start with cash provided by operations per GAAP -- the GAAP cash flow statement. We then subtract the following items which would be prepublication investments, purchases of property and equipment, additions to technology projects and dividends paid to our shareholders. The result is free cash flow that would then be available for acquisitions, share repurchases or to pay down debt.

I will spend a moment reviewing the changes in free cash flow in 2009 compared to 2008. As the table highlights cash provided by operations increased $152 million over 2008, despite a reduction in net income. The primary drivers of the strong free cash flow were, a significant reduction in cash incentive compensation payments, lower inventory purchases reflecting decreased revenue opportunities for McGraw Hill Education, significant improvement in accounts receivable collections generating $50 million as the Company's days sales outstanding was reduced by 9 days. And, of course investments declined $116 million, primarily driven by a reduction in prepublication costs of $77 million, reflecting the continuing efficiency gains in the development process as well as lower investments due to a lighter adoption calendar.

Based on our operating performance and guidance I should say for 2010, we anticipate free cash flow in the range of $550 million to $600 million. Reduction in free cash flow versus 2009 is due largely to more challenging working capital comparisons as well as increased investments that I'll discuss in just a moment. We took advantage of out strong free cash flow to contribute approximately $50 million to our US pension plan. US plan continues to be an under funded position following the significant market declines in 2008, though it has improved since last year end. Based on current projections, we anticipate no funding requirements in 2010. However, we do expect an increase in pension expense of approximately $20 million in 2010.

Our strong cash flow generation and balance sheet leave us well positioned to fund investments and return cash to shareholders while maintaining financial flexibility. Last week we announced a 4.4% increase in our dividend, the 37th straight increase. We're 1 of fewer than 30 companies in the S&P 500 that can make that statement. We also announced that we plan to resume share repurchases. [It's] our 17.1 million shares remaining from the 2007 authorization from the Board of Directors. Unlike previous years we have not indicated either a share or dollar repurchase target for the year. I reiterate it is our plan to resume the program. But the economic environment remains uncertain, so we will watch this carefully in determining when we will comments share repurchases. We plan to increase investments in 2010 to take advantage of the opportunities we see in our global growing markets. Prepublication investments for 2010 are expected to be $225 million to $235 million versus $177 million in 2009 primarily due to opportunities in the growing state new adoption market.

Purchases of property and equipment for 2010 are projected at $90 million to $100 million versus $68.5 million in 2009 and largely due to increased technology spending.

Let's now review our non-cash items. For 2010, we expect amortization of prepublication costs to be $260 million to $265 million versus $270 million in 2009. The decrease reflects the lower level of investments made in 2009. We expect depreciation to grow to $120 million in 2010 versus $113 million in 2009. Amortization of intangibles was $16 million in the fourth quarter due to the acceleration of amortization of certain acquired intangibles. That brought the total for 2009 to almost $53 million. For 2010 we expect amortization to decline and to be approximately in the $40 million range. The decline is due to the accelerated amortization of certain intangibles in 2009 as well as other items being fully amortized also in 2009.

Our fully diluted weighted average shares outstanding was 314.5 million in the fourth quarter, a 1.6 million share increase versus the same period last year, and a 0.8 million share increase from the third quarter of 2009. Full year WASO was 313.3 million shares, a 5.4 million share year-over-year decline driven largely by the full year impact of the 2008 share repurchases. Fully diluted shares at the end of 2009 were approximately 315 million. Interest expense was $20 million in the fourth quarter compared to $15.4 million in the same period last year and $17.8 million in the third quarter. For the full year interest expense was $77 million compared to $75.6 million in 2008 and we expect [2009] to be roughly comparable to 2009. Regarding the Company's effective tax rate we finished 2009 with a full year rate of 36.4% and we expect a comparable rate in 2010.

I will end with a recap of growth in unearned revenue. Unearned revenue ended 2009 at $1.1 billion, up 1.5% from the prior year. At constant foreign currency exchange rates and excluding the impact of divestitures, most notably BusinessWeek, it grew 2.8%. Financial services makes up 74% of the Corporation's total unearned revenue. Financial services unearned revenue was roughly flat as strong growth for subscription products including Ratings Direct was offset by reductions in equity research due to the end of the independent equity research settlement as well as declines driven by lower structured finance revenues. While comparatively small, McGraw Hill education's strong unearned revenue growth was driven by an increase in subscription based products, particularly at higher education where digital products are growing at a double digit rate. For 2010 we expect mid single digit growth in unearned revenue.

Thank you and now back to Terry.

Okay. Don.

Thank you. Just a couple of instructions for our phone participants as we start the question and answer period. (Participant Instructions) We are now ready for the first question.

This question comes from Craig Huber from Access 342.

Good morning. Thank you. Can you hear me?

Yes.

Couple of housekeeping things first. Can you update on what your under funded pension at the end of the year, where did that stand and comparatively what end to a year ago? I have some follow ups.

Bob?

Okay. Let me grab that information.

Why don't you ask your second question while he's gathering that.

Terry, while he is doing that, what's your appetite in 2010 here given your very strong balance sheet for both significant acquisitions versus share repurchase? How do you balance that?

Well, that's a forever question, Craig. I mean how you allocate the capital between dividends and share repurchase and organic growth projects and transactions is what we do. It really depends on what the transaction possibly could be, how attractive strategically it would be and at what kind of price. If we thought that we could get more growth and better returns going in that direction, we would do that. But it's a forever balance question. We are excited about the announcement on the share repurchase. Obviously with the dilemma of the third quarter in 2008, we needed to cancel that but we are very excited about getting back to it and the level will depend on whatever the attractiveness of other activities are. But it's a forever battle.

Craig in answer to your question the under funded status at the end of 2009 is approximately $450 million. That compares to $560 million at the end of 2008.

One last question if I could, could you update us on your thoughts, for textbooks elementary, high school here in the US, how you think the open territories will do versus 2009 and then more importantly how you think the residual sales will do and can you also size those markets for investors?

Craig, as you know, we have been watching those areas very carefully. We think the open territories in 2010 are once again going to show a decline. The number is a little bit of guesswork. On that one, I've seen numbers of down 7%, 8%, 9%. I think the higher end of that is a little harsh. We are probably looking a little less than that so mid single digits. Residuals will also be a little bit soft again given some of new adoption activity of 2008 and 2009. And of course the bright spot is the new adoption opportunities for this year. But right now unless we see some changes in all of that, we see that --- a decline in the open territories and residuals on that part; and, again, probably mid single digits on both of those.

New adoptions in 2009 probably somewhere between 500 and 510, we are looking for 925 to 975 for new adoptions that are 2010. Residual and -- is about 3 billion in 2009 and we see a little bit of a decline to somewhere in the neighborhood of about 2.8, maybe 2.85 billion for 2010.

Could you size the open territories and I will let you go?

That included open territory as well.

That was a combination number. Residual is open territory numbers, Terry, just gave included it though.

Thank you, guys.

Our next question comes from Peter Appert from Piper Jaffray. You may ask your question.

Bob, should we assume that the guidance does not include any stock repurchases?

In what regard?

The EPS number the $2.50 to $2.65 does not include the impact of any stock buy backs since you are not doing any buy backs?

That's -- we are committing the buy backs and it's just not the timing so the EPS guidance that we're giving does not reflect any benefit from the share buy backs. If we do, depending upon where we start the impact will probably be relatively small.

Thank you. Bob one other thing or Terry I understand the impact of increased marketing cost for education in 2010, but given you've got fairly optimistic revenue expectations I'm slightly surprised you wouldn't expect to see a little bit of margin leverage -- positive margin leverage in 2010. I'm wondering if there is anything else I'm missing. Then secondly, Terry, longer term -- in the good old days you've talked about the potential for maybe approaching high teens or 20% margins in education. How do you think about the margin leverage in that business longer term now?

Let me do the latter one first then we'll get to the margin leverage. I'm aiming -- target margin levels, are going to increasingly improve because of the digital capabilities and the reductions of cost, but also in terms of the acceleration of revenue opportunities on that one. When you go back with us, Peter, and we talk about we were looking at the 20% margin target, on that part, over the next couple of years that's exactly where we would like to continue to focus on, and we think that the digital investment that we have been able to make is going to help us get there.

In terms of margin, it's -- for 2010, we really have to see as we were saying with Craig, what the open territories and what some of the residual numbers are. We have it somewhere around mid single digit decline, if it's a little bit more that might put a little bit more pressure on us, on that part. But our hope is that the new adoptions are going to carry the day and that we're going to do better in open territories than we are currently thinking which will give us a little bit more optimism. But it's a little too early to tell. Do you want to add to that, Bob?

I'd just reiterate that the comments I did make did emphasize digital investments and I mentioned in my remarks higher education and professional, clearly those areas are a big opportunity. But as well, we are making significant continued investments in our Bothell, Washington K-12 development center, so this is pretty much across the board, Peter.

I understand, thank you.

Thank you, our next question comes from Michael Meltz from JPMorgan.

Three questions for you, following up on Craig's question on acquisitions, I think since I've been covering McGraw there haven't been any large acquisition. There has been Tribune Education, J.D. Power, Capital I.Q., but nothing of substantial size. Terry, when you talk about a balance would you consider $1 billion plus acquisitions going forward? And then I have two follow ups.

Well, again, the answer to that is, yes. But the question is would be, what that target is and what we thought the return potential over time and we'd have to equate that back to what we thought the return potential in doing other things would be. From a balance sheet standpoint and all those kind of things, we obviously had capacity but we want to maintain flexibility in this kind of environment and we'll be cautious in doing so. We could do size, but again, it would have to be the weigh in of what the potential returns are for it.

Within the education business the three testing contracts that will not recur, what is the estimated revenue hit in 2010, please? I assume that's incorporated in your guidance.

Michael, we are not really disclosing what the revenue is, but clearly we are seeing a decline in revenue as a result of that. But we are not really breaking out revenue components within a segment. But rest assured we are seeing a decline in revenue as a result of the three loss contracts that Terry mentioned.

Okay. S&P ratings did you raise prices in January or whenever your typical period for raising prices for the forward year?

Modest increase in price.

Okay. Last question, Terry you mentioned ABC affiliate agreements, I think you said adverse but immaterial revenue impact. Can you please discuss that a bit further, please?

Yes. As you know and as we've seen with the whole local broadcasting station business, that network compensation for local programming has gone in the other direction. Now, it's a small amount for us in that one, that's why the immaterial comment but instead of being paid you are paying for that content now. That's a trend you are going to see continue. We also want to be very careful in terms of retransmission rights in terms of negotiations on cable suppliers on that one. We will see what that affect is as well, and that's being played out as well.

(Operator Instructions) Edward Atorino from Benchmark.

Good morning, Terry. You mentioned some adverse affects in TV, I know it's a small thing, was that the affiliation agreement with ABC?

That's correct.

Did you give any back and would you give us some color on that?

Yes. Without getting in to -- it was a very small amount, but it was a give back rather than a take on that one, which is the first time that's taken place. I think you are going to continue to see that kind of a relationship.

Did you get anything for giving up something?

Well, I mean I think as far as a negotiation back and forth, there was a number of things inside it. Again, the number is a very small number.

Secondly, it seems like you've lowered your growth outlook in the school area. I haven't gone back and checked the last comment you made but it seemed like you are looking for a little bit less growth in the school area this year than last. And you mentioned it's going to depend on funding, could you sort of elaborate a little bit on that? Are you concerned that the dollars will or won't be there? Also, you answered the margin question so I won't go over that again.

Yes. No, Ed, actually I'm pretty upbeat about it because of the fact that the solidarity of both Florida and Texas in the market also with some upside look with California because they only funded 10% of their opportunity in 2009 from we thought about 40% is what they were going to do. We feel good about that part of it. The unknown part is the open territories and the residuals. We are sizing that new opportunity and relative to Craig's question we were saying mid single digits, we know that some people have a higher decline than that and some lower. We think that's a good go-in position on this thing. But that's where it's coming from and as we see that materialize and if we see it improve it's certainly going to improve our guidance for el-hi. I think 6% to 7%, for the market is a pretty good number for that, higher ed 5% to 7% and for the McGraw Hill segment we're looking for 7% to 8% growth.

Will testing continue to be a drag in 2010?

Not as much because as we unwind some of the summative contracts all the focus is going to be on the formative side. And with the success we have had with Acuity, and that continuing, that will take on some of the emphasis there. But there is no question that the summative side is creating problems for us and as we unwind those we will improve those numbers.

One last question on digital. Obviously this is a very high growth area, would you quantify in some way, how big it is? I know it's a $1 billion school business so it may not be all that dramatic but just ballpark on the digital revenues?

From our standpoint I mean both at the higher ed level where we are having terrific success with McGraw Hill Connect, Learn Smart, Tegrity, those are great areas for us, we are very excited about the prospects for McGraw Hill Connect. We haven't broken out the revenues specifically from that on this one, but we are focused at the community college level and we are very excited about that. At the elementary side as White Board penetration goes up and as supplemental materials improve, digital is becoming a bigger and bigger part of it for us. But still obviously the lion's share is print and all that but as more devices and more capabilities and the like, the digitization opportunity becomes that much more attractive.

Thank you.

Thank you we will now take our final question from Brian Shipman from Jefferies you may ask your question.

Good morning. I don't want to beat a dead horse but I want to follow up on Peter's question here again. Normally in advance of a big new adoption schedule, we have seen -- we've typically seen a big increase in prepublication investments. In 2009 we saw a big drop, so how should we view that drop in spending with respect to your guidance for 2010? Would that not bode more strongly for margin expansion next year? How do we foot that difference from historical patterns? Historically you had pointed to that as a reason for being a drag on margin expansion into a big upturn in the spending cycle.

Brian, with regard to the prepublication investment, and resulting amortization in my comments I indicated that we expect amortization of prepub costs for 2010 to be in the range of $260 million to $265 million versus $270 million in 2009. Remember the amortization cost, it really is a multiyear amortization schedule depending upon the type of product that we are creating. For K-12 it's generally five year some of the digit, for higher education it can range anywhere from four years, some of the digits down to two years, some of the digits on professional are faster. So it's a mixture of a number of properties. I think the point that we are making here is that the marketing costs, the complementary copies, pre with order costs are much more robust in the first year of an adoption. In order to secure that 30% plus share that we are after, we are going to be very aggressive in that marketplace. That's where we pointed that those costs are very significant in that first year. In years 2, 3, 4, 5, et cetera you don't have those same costs, that's where your margins expand.

Is your aggressiveness this year indicative of some new competitor or some other more aggressive competitor than you've seen in past years? You've normally been very strong in Texas and Florida.

No. It's not different in any which way but we want to be certain that if we feel we have the winning and competing products here, we just want to be very aggressive in securing the adoption opportunities where we see them.

Okay. Thank you, guys.

Thank you. We do have another question from Michael Meltz with JPMorgan. You may ask your question.

Sorry for the follow on. Just to clarify, within S&P your margin guidance for 2010 what is the base percentage that you're -- you're saying you will down 100 BPS. Is that versus 39, a little over 39%?

That's right.

Correct.

Over a -- understanding the compliance costs in 2010, and both the kind of lag effect of the subscriptions where do you see margins going there over a 3 to 5 year period?

Well, we've got to make assumptions here on revenues and structured finance revenues and the like. When we were at 45% margins and we were targeting that as the level, we now think that the new level is probably 200 basis points below that on that one. Now you've got to start making assumptions on the return of structured product and the like to get there. But we are looking at about 200 basis points in terms of the regulatory and compliance aspect.

Okay. Thank you for your time.

Thanks.

That concludes this morning's call. A PDF version of the presenters' slides is available now for downloading from McGraw-hill.com. A replay of this call will be available in about two hours. On behalf of The McGraw-Hill Companies we thank you for your participation and wish you a good day.