標普全球 (SPGI) 2011 Q1 法說會逐字稿

Good morning and welcome to the McGraw-Hill Companies first-quarter 2011 earnings call. I'd 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 slides go to www.McGraw-Hill.com and click on the link for the earnings announcement conference call. At the bottom of the webcast page are two links, if you are listening by telephone please select the first link for slides only. For both slides and audio via webcast select the Windows Media link. If you need any technical assistance press star zero and I will assist you momentarily.

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

Thank you and good day to our worldwide audience. We thank everyone for joining us today for McGraw-Hill's first-quarter 2011 earnings call. I'm Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. With me today are Harold McGraw III, Chairman, President and CEO, and Jack Callahan, Executive Vice President and Chief Financial Officer.

This morning the Company issued a news release with first-quarter earnings results. We trust you all had a copy and 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 is www.McGraw-Hill.com.

In today's earnings release and during the conference call we are providing adjusted revenue, free cash flow and net cash information. This information is provided to enable investors to make meaningful comparisons of the Company's operating performance between periods and to view the Company's business from the same perspective as management's. The earnings release contains exhibits that reconcile the differences between the non-GAAP measures and comparable financial measures calculated in accordance with US GAAP.

Before we begin I need to provide certain cautionary remarks about forward-looking statements. Except for historical information the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events.

Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard we direct listeners to the cautionary statements contained in our Form 10-K's, 10-Q's and other periodic reports filed with the US Securities and Exchange Commission.

We are aware that we do have some media representatives with us today on the call. However, this call is for investors and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at area code 212-512-3151 subsequent to this call -- that's 212-512-3151. Today's update will last approximately an hour; after our presentations the meeting will be open to questions and answers. It's now my pleasure to introduce the Chairman, President and CEO of McGraw-Hill Companies, Harold McGraw.

Okay, thank you, Don, and good morning, everybody, and welcome to our conference call. As Don said, with me today is Jack Callahan, our Chief Financial Officer. We're going to review the first-quarter results and the outlook for the McGraw-Hill Companies for the rest of 2011. Following our presentations obviously Jack will discuss the key financials and then we'll go to any questions or comments that anyone has.

As we reported earlier this morning in our news release on the first-quarter results, a promising year is off to a good start. Earnings per share grew by 18.2% to $0.39 a share; revenue grew by 7.7% to $1.3 billion; our new segment, McGraw-Hill Financial, is unlocking new value. So let's start today's called by reviewing the performance and the prospect and begin with McGraw-Hill Financial.

McGraw-Hill Financial is off to a strong start adding subscribers, 74% of the revenue comes from subscriptions, and growing in both international and domestic markets. In the first quarter, revenue, with the addition of TheMarkets.com, increased by 16.2% and 11.9% without the acquisition. Operating profit grew by 35.3%, the operating margin expanded to 29.7%.

McGraw-Hill Financial is focused on integrating and involving its capabilities and to one scaled operation, offering global financial professionals our high-value content across all asset classes. We continue to make progress in leveraging our intellectual property across the new organization while growing individual businesses. This activity involves developing innovative and integrated solutions for clients to manage investment and trading strategies.

Case in point, a new leveraged loan index for our Benchmark group that was created in collaboration between two McGraw-Hill Financial businesses, S&P indices and S&P leverage commentary and data, designed to expand S&P's family of fixed income indices the index became the basis of the first bank loan exchange traded fund to hit the market. Assets under management in the new Invesco power shares leveraged loan ETF hit $70 million in the first month.

This is just one of 32 new exchange traded funds and based on S&P indices that were introduced in the first quarter of 2011. 18 of the new ETFs, by the way, were launched outside the United States. We now have 333 exchange traded funds linked to S&P indices with $323 billion in assets under management and, by the way, that's a 27% year-over-year increase.

As this table illustrates, we maintain an active ETF pipeline to drive revenue growth. Besides driving revenue growth, these new ETFs have also diversified our product offering. In 2006, 62% of assets under management in exchange traded funds were tied to our largest ETF and of course that's the SPDR S&P 500.

At the end of 2010 the percentages dropped to 43% reflecting the diversification of our ETF revenue across different asset classes and different geographies. Expect more collaboration and diversification.

In the integrated Desktop Solutions group subscriber demand for capital IQ data, ratings content from the global credit portal and the addition of TheMarkets.com got the year off to a very strong start. The integration of TheMarkets.com is proceeding smoothly. You can now access TheMarkets.com product via the Capital IQ platform.

In the first quarter Capital IQ grew its client base to more than 3,600 and that's a 23% year-over-year increase. The Enterprise Solutions group was formed to integrate multiple cross asset data sets and to streamline the delivery of McGraw-Hill Financial, S&P and third-party data into one platform.

That means, for example, introducing new integrated technologies such as application program interfaces, or API, to enable clients to more easily incorporate data directly into their systems and into their workflows. Easier access to more information is obviously good for business and allows for greater insight and transparency into the markets our customer serve. We continue to see demand for our data in both pre- and post-trade markets.

For example, Global Data Solutions continues to grow the number of clients who are buying multiple services instead of just one-off data sets, especially in global markets. We are also pleased to report that in the Wall Street Journal's new annual survey of "The Best Analysts on the Street", Standard & Poor's equity research leads the list of 86 firms with 10 winning analysts. The Best on the Street survey identifies the top five analysts in 44 sectors based only on stock picking skills.

To be eligible analysts generally had to follow at least five stocks in an industry group during the year. Nearly 7,000 analysts and more than 500 firms were surveyed. The Wall Street Journal Online announced the winners last week; the newspaper will publish the formal list on May 10.

S&P's Equity Research is an important resource for MarketScope Advisor which is an online service for more than 80,000 financial advisors. Going forward S&P Equity Research will be available on Enterprise Solutions and through our integrated Desktop Solutions group. Clearly McGraw-Hill Financial is off to a very good start and is finding new ways to unlock value.

Let's sum up then for McGraw-Hill Financial -- we expect double-digit revenue and operating profit growth this year, a combination of strong organic growth and the acquisitions of Markets.com.

Okay let's move over to Standard & Poor's. Powerful trends and record issuance in global bond markets were evident in Standard & Poor's first-quarter top-line performance. Revenue grew by 10.4%, but operating profits increased by 0.8% primarily because of timing issues, difficult expense comparisons and a decline in structured finance; the operating margin was 43%.

With year-over-year cost comparisons easing in subsequent quarters and favorable market trends expected to continue, we now anticipate that Standard & Poor's operating profit will accelerate for the balance of the year. That implies about 10% growth over the balance of the year to meet our current forecast of high-single-digit operating profit growth for the full year. Let's start by reviewing the difference between the top- and bottom-line growth in the first quarter.

First, foreign exchange negatively impacted profits in Q1. While foreign exchange rates increased S&P revenue by $1.9 million, it reduced operating profit by $6.1 million. Excluding foreign exchange revenue grew by 9.9% and operating profit increased by 4.1%.

Second, the first quarter represented S&P's most difficult expense comparison. Q1 2010 margins were 47%, the highest of the year, versus a full-year 2010 adjusted margin of 44.5%. That record was achieved despite the fact that Q1 2010 was S&P's lowest revenue quarter of the year and lower than the first quarter of 2011 by $42 million.

Third, expense comparisons will become easier as the year progresses. S&P has made significant investment in technology platforms and staff to deal with the new regulations of credit rating agencies. That's the QCCR program that you've heard us talk about and, again, QCCR stands for quality, criteria, compliance and risk which are managed independently of the ratings business.

In 2010 we incurred incremental QCCR costs of $17 million with efforts focusing on the implementation of the European Union and Japanese requirements which were effective towards the end of the year. As a result this increase was almost entirely realized in the second half of 2010 making first-half comparisons particularly challenging.

For 2011 we anticipate an incremental increase of $12 million to $15 million and expect the increase to be more evenly spread. In subsequent years we expect QCCR cost to increase at a lower rate, level off and possibly decline as new regulatory requirements subside. (Inaudible) increase, mostly at CRISIL in India, include the acquisition of Pipal Research late in 2010.

The factors that helped produce a strong close in the fourth quarter last year underpin our solid top-line growth in the first quarter of 2011 and our prospects for the remainder of this year. Transaction revenue at Standard & Poor's grew by 17.2% in the first quarter as worldwide high yield corporate bond issuance of $124.4 billion ellipse the previous record of $121.1 billion set in the fourth quarter of 2010.

A key contributor to this performance was European high-yield issuance which grew by 95% to $36.3 billion in the first quarter, and that's a new record too. A solid increase in investment grade bonds and robust growth in bank loan ratings also contributed to our growth.

As this table shows, refinancing was key to the high-yield volume. According to the S&P Leverage Commentary and Data group, 64% of the proceeds were used for refinancing in the first quarter. Coincidentally, refinancing activity represented also 64% of the high-yield bond buy-in last year.

The rapidly growing leveraged loan market remains centered around what S&P calls the three R's of leveraged lending -- repricing, refinancing and recapitalization. There's still unrealized potential in this market; S&P estimates that there is $5.6 trillion in bond and loan maturities coming due in the US and Europe between 2011 and 2014. And while some of the 2011 maturities have already been refinanced coming into this year, S&P estimated maturities in the range of $1.2 trillion to $1.5 trillion per year between 2011 and 2014.

An improving economy, low default rates and very low yields on less risky debt should keep investors focused on opportunities in the high-yield and leveraged loan markets all year. In the search for yields some investors are tuning out concerns about risk. We have seen deals oversubscribed for companies with B- ratings. The increased role of hedge funds in the high-yield market has also opened up a bigger market for CCC rated debt.

The search for yield will persist as interest rates remain low and spreads, the excess interest rate over treasury bonds, remain tight. As this table shows, the speculative grade composite spread had tightened to 478 basis points at the end of the first quarter. Both speculative-grade and investment-grade composite spreads at the end of the first quarter were well below the five-year daily moving average.

An increasing active M&A market should also contribute to growth in new issuance and, with banks less willing or less able to lend, new borrowers will turn to the public debt market. We continue to move ahead without much help from the public or the structured finance market. Public finance issuance fell by 52% in the first quarter; the decline is largely attributed to the expiration of the Build America bond program at the end of 2010. It may take some time out for the public finance market to show year-over-year growth.

The structured finance market was mixed -- soft in the United States and more active in Europe. But even with the decline in structured finance surveillance due to the defaults and maturity deals, non-transaction revenue grew by 6.3% to $266.6 million and represented 60.2% of S&P's total revenue in the first quarter. Non-transaction revenue now includes a royalty of $15.2 million which McGraw-Hill Financial pays for the right to use and distribute S&P's content.

Increased revenue from CRISIL, our majority owned company in India and non-issue-based analytical services also helped offset the decline in structured finance. We confidently expect S&P's non-transaction revenue to continue growing in 2011.

Earlier I reviewed the costs of creating our QCCR framework to deal with regulations. We expect more regulations this year; there will be some new rules from the Securities and Exchange Commission to implement requirements mandated by the Dodd-Frank Act, new rules have been passed in Hong Kong and we anticipate new regulations from Canada and Singapore. Many of them incorporate European Union requirements in an effort to meet EU equivalence requirements for the endorsement and compliance with IOSCO model code of conduct for rating agencies, that's the security commissioners out of Madrid.

We are also working with regulators and market participants on the implementation of new rules for credit ratings in the European Union relating to endorsement. The bottom line, S&P has implemented a sound and effective control framework to accommodate compliance with additional regulatory requirements.

We continue to make progress on the legal front. To date 20 of our motions to dismiss have been granted in their entirety, eight more lawsuits have been voluntarily withdrawn. It's also worth noting that five of the dismissed cases involve fraud charges. As we have said all along, we continue to believe the legal risk is low.

In the CALPERS case a hearing has been set for August 23 on whether the plaintiff can demonstrate that it has substantial evidence to support each element of its claim and if there is a probability of success on the merits of its claim. The burden shifted to CALPERS after the court granted our motion that the complaint fails under a California statute protecting speech made in the public interest.

Discovery continues in the Abu Dhabi case. In the Anshutz case a New York court dismissed the plaintiff's claim of negligent misrepresentation in regard to the securities issued by Merrill Lynch. But in the California federal court the same claim involving securities issued by Deutsche Bank survived a motion to dismiss. We have asked the California judge to permit us to seek an appeal of this decision to the United States Court of Appeals for the Ninth Circuit in view of the clear conflict with the New York federal court's dismissal rating.

Overseas we have submitted our final brief in the Parmalat case and now wait a ruling. And last week a German court dismissed another lawsuit relating to S&P's layman's ratings, recognizing that ratings disseminated globally from our US ratings business should not subject S&P to lawsuits in Germany without some specific connection to that nation.

So let's sum up then for Standard & Poor's -- legal risk remains low, regulatory issues are manageable, high-single-digit revenue growth for 2011, operating profit will accelerate for the balance of the year and grow in the high-single-digits for the full year.

Okay with that let's go on to McGraw-Hill Education. For McGraw-Hill education, in the first quarter revenue decreased by 4.6%; the operating loss increased by 22.2%, and that was reflecting the revenue decline in ramped up investment for digital infrastructure that will position us for future growth. Given the seasonality of the education market we recognize that the first-quarter results are a small fraction of the year and certainly are not indicative of what's ahead for 2011.

In the elementary/high school market first-quarter sales are mainly orders for replacement copies. In higher education the sales mainly reflect last year's adoptions. In both markets the first quarter through mid-May is the major selling season for this summer's orders. Our sales force is in the field and working hard to ensure success in the seasonally important third quarter.

But there is something different about the first quarter this year. It is simply this -- the robust double-digit growth of digital products, particularly in higher education and the professional markets. Digital products and services are the harbinger of change that is coming in the education market. No one can be sure when the tipping point will occur, but we cannot sit back and wait for it to arrive.

Our investment in digital capabilities and capacity builds on McGraw-Hill Education's continued success in the marketplace. It positions us to meet the growing demand for our digitally delivered products that is already evident in testing, in K-12 and higher education and in professional markets and it will support the launch of a broad array of new digital products that are now in our pipeline.

The heightened investment in digital products reflects the opportunity created by our market's increasing capacity to utilize wholly digital product delivered online whether through numerous sites that McGraw-Hill operates, sites maintained by educational entities ranging from individual public schools in the US to major colleges and universities around the world, or sites operated by third-party providers such as Amazon.

For two decades McGraw-Hill Education has been able to supply significant content in digital form owing to ongoing investments in the transformation of our internal publishing processes. That transformation is now complete, enabling us to poor content into a variety of formats, print or digital, as indicated by market demands. These investments are already enhancing our opportunities for 2011 and beyond.

New and forthcoming digital products from McGraw-Hill Education represent a new generation of digital resources. A far cry from the static PDF versions of print books, they feature the interactivity and audiovisual capabilities of digital media that a critical mass of customers now have the bandwidth to access and to fully utilize. Our new products are designed to differentiate us from others and genuinely enhance the teaching and learning experience.

In the el-hi market there are the recent releases of CINCH Math and CINCH Science, full curriculum basal instructions materials delivered online. We're the only publisher to offer comprehensive all digital programs in these subjects.

In the testing market the shift to online testing and all-digital reporting is a growing trend. With Acuity, our leading product in the formative assessment market, students can be tested online using paper and pencil or with hand-held response devices; increasingly schools are choosing the online option.

In higher education we have McGraw-Hill Connect, the industry's most advanced homework management platform for students, and Create, a digital publishing system that allows instructors to build customized e-books for their courses. We have the highly sophisticated computer adaptive tutoring programs, LearnSmart and [Alex]. And for several years now all of our front list higher education titles have been available for purchase as e-books from a wide variety of vendors and for a wide range of e-reading devices.

In professional markets we are seeing steady increases in the number of subscribers, domestic and international, for our digital resource sites in medicine, engineering, and business. More than 6,000 of our professional titles are currently available as e-books and we are introducing a line of enhanced e-books featuring embedded audio and video content.

Our product line of downloadable applications for mobile devices is also going strong in the professional market. We offer more than 150 apps for business, medical, technical and educational test preparation and another 75 apps will be added this year.

The growth of digital products clearly requires technology systems, robust platforms that guarantee product performance. That's the second factor in our increased investment. As the delivery of digital content has shifted away from CD-ROMs and local servers to the Internet, it is imperative for online providers to ensure reliable accessibility and functionality 24/7.

That's why we recently made a substantial investment in the creation of a state-of-the-art digital hosting and support center which is paying off in increased product reliability, but with a higher usage we are experiencing for current products. And with many new projects in the pipeline, including the expansion of online testing, we will be making the incremental investments in infrastructure and utilizing the cloud to ensure our capacity as well as our ability to provide the necessary levels of expert customer support.

We expect our digital products and services to produce another solid year of growth in 2011. As the second-quarter selling season progresses, we are monitoring district adoption activity levels, state funding developments and buying patterns across our markets.

We think the el-hi market is stabilizing. The state new adoption market could still meet or exceed 2010 levels. But that depends to a great extent on the Texas legislature and how it funds instructional materials. We probably won't know much about which programs will be funded and for how much until sometime in May, maybe towards the end of May.

We are currently also very carefully watching North Carolina. There's a reading and literature adoption that was recently called for purchase this year, but here again the funding has not been approved and we're waiting for that. There are signs of pent-up demand in the open territory, which is very pleasing, but it's again still early days in this market and too soon to make a forecast.

In the US college and university market we still believe the market will grow between 4% and 6%. Enrollments are expected to show modest growth after the surge in the last two years. In 2011 we will again see the benefits of our Blackboard connection. It's hard to overstate the value of offering students and instructors a single point of access for course content and study tools through Blackboard's learning management system. Earlier this month we expanded what began as a domestic arrangement with Blackboard in international markets as well.

Let's sum up. Our expectation for the education market -- flat to minimum in growth in the elementary/high school market; 4% to 6% growth in the US higher education market; and for McGraw-Hill Education in 2011, revenue growth in the low-single-digits, a decline in operating profit driven by investments, especially for digital developments. The decrease could range from mid-single-digits to high-single-digits.

And finally, let's review McGraw-Hill Information & Media. In 2010 this segment substantially improved its operating margin. At that time we said the improvement was not a one-year phenomenon. We said the new level was sustainable. In the first quarter Information & Media started delivering on that promise of sustainability. With revenue growth of 10.3% the operating margin improved to 16.4%, up from 13.5% for the same period last year.

We are benefiting from the growth in key markets, but what is a less well recognized is that our business-to-business group is now primarily a subscription business delivered digitally. Currently more than 70% of the B2B group's revenue is digital. Revenue for the B2B group increased by 10.3% in the first quarter fueled by growth at Platt, J.D. Power and the acquisition of BENTEK Energy in January.

Platts has a strong position in the data, price discovery and market news across many commodities including oil, natural gas, coal, metals, petrochemicals, nuclear and electricity. Acquiring BENTEK Energy is Platts' latest step to expand its capabilities in core markets. As this graph illustrates, BENTEK with its expertise in natural gas adds to Platts' capabilities in three key areas along its value chain. The goal is to embed our news and prices in the trader's workflow and provide new analytical capabilities.

The growing demand for oil and the uncertainty of supply creates energy price volatility and new clients for the entire range of Platts' products and services; that was evident again in Platts' first quarter performance.

J.D. Power also grew globally benefiting from the recovery in domestic and international auto market, but the growth was not limited to the automotive market. J.D. Power also showed gains in healthcare, financial services and in insurance markets. J.D. Power expects continued recovery in the world-wide automotive market. J.D. Power now forecasts 7% growth this year in global light vehicle sales and 20% growth in the United States.

A pickup in automotive [ton] sales and increased retransmission revenue contributed to McGraw-Hill Broadcasting's 10.2% increase in the first-quarter revenue. And therefore summing up for Information & Media, revenue growth in the mid-single-digits, adjusted operating profit growth in the mid-single-digits as well.

Wrapping up then for the McGraw-Hill companies overall, we are obviously very pleased with the solid start to the year, but the first quarter is seasonally small. We continue to maintain our guidance of diluted earnings per share of $2.79 to $2.89. Okay, with that and our four segments, let me turn it over now to Jack Callahan, our Chief Financial Officer, for some added financial guidance.

Thank you, Terry, and good morning to everyone on the call this morning. It is a pleasure to review with you a strong start to 2011. Today I will focus on our robust cash outlook and strong financial position, capital allocation and a couple corporate items.

We continue to expect another year of strong cash flow. Before dividends we expect to generate cash flow greater than $1 billion. After dividends free cash flow is projected to be in excess of $700 million. We expect to generate this strong free cash flow despite increased capital investments.

For 2011 we continue to expect prepublication investment of roughly $200 million to $225 million or approximately a $50 million to $75 million increase versus 2010, which was an unusually low year. Capital expenditures are projected to be up to $150 million driven in part by increased digital and technology investments. This compares to $115 million in 2010.

We are extremely well-capitalized with net cash and short-term investments at quarter end of approximately $100 million. Cash and short-term investments at the end of the quarter totaled $1.3 billion while gross debt was comprised of approximately $1.2 billion in long-term unsecured senior notes; no commercial paper is outstanding.

Turning to capital allocation, we spent $250 million in total on acquisitions and share repurchases in the first quarter, which were the primary drivers of the $250 million decline in cash and short-term investments from year end. We spent $126 million on acquisitions, the most notable being the BENTEK Energy acquisition, which, as Terry discussed, is now part of Platts in the Information & Media segment.

In Q1 recent acquisitions accelerated revenue growth by approximately 150 basis points while the profit impact was modestly dilutive. We also actively repurchased shares in the quarter. We repurchased 3.3 million shares for approximately $124 million averaging $37.44 per share. A step up in share repurchases this year versus our initial guidance is under consideration given our cash position and a reduced cash commitment for acquisitions now that the previously announced OPIS transaction has been withdrawn.

As a reminder, there are 5.1 million shares remaining in the current 2007 program. To further increase buybacks, a new program would need consideration and formal authorization by the board of directors.

Going forward, our robust free cash flow and strong balance sheet enables us to selectively add attractive strategically-relevant businesses like BENTEK to the McGraw-Hill portfolio while continuing to return cash to shareholders via share repurchases, subject to market conditions.

Now finally let me address some corporate items. Corporate expense was $34 million in the quarter and decreased by 4% or $1.5 million from the prior year. 2011 expense benefited from a decline in real estate costs as well as tight cost control. For the full year, we expect corporate expense to increase in the mid-single-digit range versus 2010, adjusted at corporate expense of $164 million. The 2010 expense excludes the one-time charge of $15.6 million related to subleasing excess space in the Company's New York facilities.

Net interest expense was $19 million in the first quarter, a modest decline of $3 million versus prior year. We still expect full-year interest to be largely comparable to 2010, which was $82 million. Our effective tax rate was 36.4% in the first quarter, flat versus last year.

Net income attributable to non-controlling interest was $4.2 million, largely driven by CRISIL. Our diluted weighted average shares outstanding for the quarter was 309.6 million, a 6.7 million decrease from the prior year and a 0.7 million decrease from the fourth-quarter 2010. The decline is due primarily to share repurchases which more than offset equity-related awards.

In closing, I appreciate all the hard work from our associates across the McGraw-Hill companies to deliver a solid start to 2011. And we appear to be on track for a good year.

Now let me turn the call back over to Don Rubin for the Q&A session. Don.

Thank you, Jack. Just a couple of instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star two. If you have been listening through a speakerphone but would now like to ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure good sound quality for everyone.

We are now ready for the first question.

William Bird, Lazard.

Thank you. Terry, I was wondering if you could just elaborate a little bit more on what you're seeing in the S&P pipeline. And then second, your outlook for higher ed seems to be at odds with the recent declines you've seen. I'm just wondering what you expect to drive growth in that sub segment. Thank you.

Yes, thanks. Yes, the S&P pipeline continues to be strong. Now obviously the structured finance side is soft and especially here in the United States. Although we're seeing some activity in asset-backed deals and we expect a pick up in the commercial mortgage-backed market. But the residential mortgage-backed market obviously remains very low.

Where we are starting to see some structured activity is in Europe and that's starting to pick up. But again, the corporate market, sovereign market, the muni market is off as conditions exist state by state and city. But also, Bill, we're seeing a lot in the high-yield market and a little bit in the CLO market. So from a pipeline standpoint it's quite good. So we were pleased with the 10.4% revenue increase and we expect that to continue into the rest of the year.

As far as higher ed goes, Bill, again the move on the digital side is really helping us on that, not only in the professional side but more importantly with McGraw-Hill Connect and those capabilities and we're going to continue to push very aggressively on that.

Again, we will continue -- it's a little early. The 4% to 6% I think is conservative. On that one we'll see where we go with that and probably have a little butter indication as we get closer to June on that part. But it's solid on that part and we expect it to be a good generator for us for the full year.

Bill, on higher ed more specifically, I think on our last call we spoke to a little bit of weakness in our results as we ended 2010 and into the early part of 2011. We did see a bit of a pickup as we closed out Q1 in March and early indications that April is off to a solid start. So a bit of a rebound from the trends we had spoken to earlier.

Great, thank you very much.

Peter Appert, Piper Jaffray.

Thank you. Terry, the strength in the McGraw-Hill Financial business is particularly impressive, so just a couple of questions on that. First, the margin of 29.7% you did in the first quarter, do think that's a reasonable run rate for the year? Secondly, as we think about the four segments, maybe you mentioned this and I didn't get it, but was there one particular product line or segment that drove the year-to-year strength that we saw in the first quarter?

Again thanks, Peter, because we're very pleased with the start with McGraw-Hill Financial. Now we've known this for a little bit and unlocking value is -- I think is the right phrase here. We've seen good client attraction in Capital IQ, the efforts to integrate all of these businesses in terms of a horizontal platform is going very well.

And so the integrated Desktop Solutions business has been a source of strength for us. But it's really being able to combine a lot of different data and to embed it into customer workflows that we're getting that kind of benefit.

Obviously on the index side, continued growth there. I mean we're up to 333 exchange traded funds based on S&P indices. And one of the nice things is that we were talking about the diversification and the geographic distribution is broadening in all of that. And so we're very pleased with that.

And I think that given some of the shifts that you're seeing in terms of the consolidation of movement in terms of exchanges and the like, where exchanges are trying to differentiate themselves through product differentiation plays to our strength and all that and so we're benefiting from that. But yes, we're very pleased with the strong start.

And as far as the margin is concerned, again, because of the royalty rate, it was probably a little artificial at the end of the fourth quarter in terms of where the margin was. We like where the margin is now on this one and we think that we can do better on that one and we'll see as the year progresses.

Terry, can I just sneak in one other question unrelated to that? On the education market, the pace of M&A activity has definitely picked up recently. Does McGraw-Hill need to be -- to make acquisitions or step up spending to stay truly competitive in terms of these digital initiatives?

Well, you've got to differentiate between acquisition and organic growth. Things like McGraw-Hill Connect and Create, we put an awful lot of effort into that digital transformation and we're benefiting from that. When you start talking about different ways of being able to present content in their various platforms, the arrangement that we entered into with Blackboard has helped us a lot that way. We've put a lot of effort into the testing side and rather than acquiring capabilities we built the Acuity platform that we're benefiting from now on the formative side.

So I mean it's always a balance on that one. If there's a capability that is going to help you accelerate into a particular opportunity, okay. But it's a balance between being able to develop that capability or whether you acquire that capability. But again, in terms of the positioning that we've taken, it's been a combination of both and we'll continue to watch that balance.

Yes, we're continuing to look very closely at those opportunities. I think the two things I would just add on Terry's comments is we just want to be sure that any of these acquisitions are not -- that they really help us accelerate our core strategy and moving forward they're just not distractions. And secondly, we want to be very disciplined when it comes to valuation. Some of these properties are quite rich.

Great, thank you.

Sloan Bohlen, Goldman Sachs.

Good morning. Just a follow-on from Peter's question, just a little bit of trying to dig into what the costs on that additional expenditure is. One, if you could provide a little bit of granularity. You talked a little bit about digital hosting being one area, but maybe if you could kind of break out the buckets of where the spending is. And then second, if you could think about maybe just the longer term, what you guys are looking for in terms of return on invested capital?

Okay, (inaudible)?

Could you repeat the first part of the question again? I just want to be sure that I'm in the right place.

Sure, Jack. Just in terms of the different buckets for what types of -- on the digital investment side you talked a little bit about digital hosting. How much of it is that versus how much of it is investment in the cloud? I just want to try and get a break up because it seems like a big --?

At least I can, in the context of like say the education segment where obviously we have a great deal of work to extend out that digital portfolio. A good part of, as you said, the year-on-year decline or the increased loss this year versus the quarter of last year was largely related to digital investments, largely in support of our higher ed and to some degree our professional business.

And there's also -- I would also add there's also maybe some -- there's also some investment from a hosting point of view as it relates to our online testing capability that we have too with education. So those are the primary drivers in the first quarter. But going forward we anticipate that we'll extend more broadly into -- into the K-12 space as we start to move forward on the development of future programs.

And I think also, Sloan, that again we're all watching the market activity very carefully. In many cases digital or hybrid product is going to be critical in terms of being able to be successful in some of the adoptions. We are obviously watching Texas very carefully and also North Carolina, as I mentioned, in all of that. It's a little bit too early to tell here, but again from the transformation aspect of cost associated with digital, you've got to be there on that one to be competitive in those kinds of adoption markets.

Okay, I'll follow up with that one. And just one more if I could. Just Terry, you talked a little bit about the drivers of the non-transaction revenues at S&P. Could you maybe just elaborate a little bit on what is driving that bigger pool?

Well again, when you're talking about the surveillance and the compliance side of this, you've got an awful lot of fees generated with the refinancing activities and the like. And so those will continue to be very strong contributors. But it's really having to do more with the annual fees associated with surveillance.

All right, thank you, guys.

Michael Meltz, JPMorgan.

Thank you. Two clarifications then an actual question for you. You reiterated the EPS guidance for the year and it sounds like through the presentation you're basically reiterating everything you said back in February in terms of revenues and EBIT projections for the segments. Can you just -- or is that true?

Yes, Michael, I think -- I mean this is the first quarter; it's the smallest quarter of the year. We're off to a really good start and we're pleased with that, but it's one quarter and the start of the year. I think the message really is that things are really in shape for a good year here. How good? We'll see as we get a little bit more market evidence I think, but it's shaping up very nicely.

So at this point in terms of earnings guidance and the like it's too early to make any changes that way. So the $2.79 to $2.89 is, as you say, a repeat from February. But we'll see, let's see where the strength and some of the issuance, let's see the continued strength in McGraw-Hill Financial across the board, let's see how Platts and J.D. Power continue.

And I think by the time we get together in a couple months we'll have a better picture of the full year and then we can talk about fine-tuning. But right now it's just one quarter, start of the year. What's pleasing is that it's a good start and that everything is sort of falling in shape the way we were hoping it would and we'll just see how strong it gets.

Okay. And then Peter's question on M&A, educational M&A. It sounds like from your response, and I don't want to put words in your mouth, but Terry, you said three times capabilities, Jack said discipline and you don't want distractions. Is the inference that we should take that you are more focused on tuck-unders than larger transformational acquisitions?

Well again, I mean in terms of the opportunity -- the market opportunity aspect of this thing, the digital transformation is critical. This is moving at a pace that is very rapid and if you don't have the internal capabilities -- I mean you just can't go shopping and buy a little of this and a little of that and overpay and go through all of the integration capabilities and the like. You have to have the internal capabilities to do that.

And so what we have done is both in terms of staffing and in terms of platform capability, we have really put a lot of effort into building that core competency. And again, that's why we've been able to develop McGraw-Hill Connect, which is far and away a superior online product and being able to scale it now even more is going to be very important. McGraw-Hill Create is going to be important there.

What we did in terms of getting after administrative platforms is we entered into an exclusive arrangement with Blackboard to be able to accelerate that. And again, as I mentioned to Peter, the Acuity platform -- that was home-grown, that was home built, and we're very pleased with obviously the formative testing market and where that takes us.

So it's always a balance on that one. So yes, we're looking for components and capabilities, but whatever it is that you do on that one you have to have internally the core competencies to be able to grow it. And so that's the focus that we've taken and how you get there really is a balance.

Okay and then my actual question on -- just to drill down a little bit further. I know you went over this in the slides. The S&P ratings expenses or margin in the first quarter, can you just maybe explain again? I guess the EBIT growth was fairly or very light in Q1, the margin was disappointing in Q1 and just -- you mentioned compliance costs will decline in the second half year over year. I assume the international expansion costs are still in there, the acquisition -- higher market acquisition costs are still (multiple speakers).

That's right, that's right.

-- or I'm sorry, the Pipal is still in there. What else will be different? If revenue growth is similar the next few quarters what else will be different in expenses?

Yes, again these are all timing issues and factors on this. There are a couple of factors and we were breaking them down for you. That QCCR and the data infrastructure aspect has been a big part, just making sure that our systems are as bulletproof as possible. And so we focused a lot on that part. And so that's a portion of it.

We've got investments in analytical resources and this is US, outside the United States, India as well. You've got the foreign exchange aspect, both the constant currency and the transaction side. And we also had some one-time items from India. You've got the real estate gains on one standpoint and you've got the Pipal acquisition on the other. And so we've broken it down.

What you're looking at in terms of revenue, you had an increase of revenue -- and again, in a smaller quarter -- of $42 million in revenue, that got us the 10.4% revenue gain. But in expenses we had a $40 million increase as well and it's those factors, the categories that did that.

We don't see that going forward; we feel very good about the full year profit picture. And you will start to see in the second, third and fourth quarter the profit margin there. And again, we're talking about for the balance of the year about 10%, and that would get you to your low-single-digit.

Now if we start to see a pickup in some of the issuance, again especially into the bank loan market in terms of some of the high yield in terms of some of the corporates, that will obviously benefit. But we should wait a little bit and see some of the results before we start projecting that. But yes, these are just more one-time hits into the first quarter and we feel very good about the full year. Jack, do you want to add anything to that?

I would just add a couple of these things are not necessarily new to the first quarter; they started to be layered in last year. And if you look at the margins sort of in the back half of 2010 for S&P, they're pretty much in line with the margins that we posted here in the first quarter. So I think as we work our way through these overlaps in the first half of 2011, I think we'll return to more solid profit growth beginning in the second quarter, but then I think more extensively in the back half of the year.

Okay, thank you for your time.

Craig Huber, Access 342.

Yes, good morning. I had a similar question on these cost [recipes]. Maybe if I could just ask it a little bit differently here. This $40 million increase in S&P costs year over year, how much of that should we think of is not going to repeat by the time we get to the second half of the year? Can you break that out?

Let me let Jack go through more specifically some of the numbers on this. But again, the two big pieces in here really are the foreign exchange and also the QCCR. One of the things that we're going to see, Craig, is that as you know, I mean over the last three years the investment that we have made in the overall QCCR has been significant.

We knew that this was going to peak about now and that's why we came up with a forecast that in QCCR we saw a $10 million to $15 million incremental increase this year. We're taking a lot of that in the first quarter on that one.

So the reason that we're very optimistic about the rest of the year is that those costs now significantly subside and are behind us and we'll benefit from that. And again, outside of the India situation, the acquisition there, is additional investments. But, Jack, do you want to give any more color on that?

Well, I think there's the -- about two-thirds of this increase, I'd view it as it's sort of being worked into the run rate that these costs are to be worked into the run rate back in the third quarter of last year. So I think we lap that as we get into the back half. And then in Q1 itself, between currency and some other things, there's probably $10 million to $12 million of sort of one-time impacts that are now behind us.

Okay. Then also can you speak about your issuance trends in Asia in the quarter and also the long-term opportunity there?

Well, let's see. Again, the markets are still dominated obviously by more of the developed countries. What we're seeing, as you know, is the development of local bond markets literally around the world as there's less reliance on banks. So what we're seeing is increased activity in those countries that have higher consumption to GDP ratios and that is showing nice growth.

So obviously outside of the large developing countries, India, Brazil and China, you're seeing activity in Malaysia, you're seeing Korea, you're seeing Indonesia and a little bit in Thailand. And so we have invested significantly in terms of developing local relations in all of those markets.

But we continue to -- we will continue to see much more participation coming out of the Asian markets and especially out of the ASEAN groups in the years ahead. But it's still a smaller portion and therefore the growth rates are high because it's coming off of low bases. But those markets are going to be quite strong.

Then also can you just discuss a little further about your outlook for structured finance for the remainder of the year, please?

Yes, I mean what we're looking at, Craig, is obviously that there is more structured activity that we're seeing coming out of Europe than here. The asset-backed market never went away, I think that there was given fear and uncertainty, I think there was less issuance, but it never went away. And so that is pretty strong.

What we're looking for domestically is probably a pickup in the commercial mortgage-backed market. I think it's going to be a while for the residential part of the market. But again, in terms of some of the collateralized loan obligations and things like that, I think it's an improving picture.

I can't say that we'll return to pre-crisis conditions, but I think over the next two, three years, whatever, you're going to see just a steady momentous pickup in structured activity on that one. And I just think there's going to be obviously a lot less risk associated with it and therefore less yield orientation. But it's an improving situation but slow.

Great, thank you.

Doug Arthur, Evercore.

Yes, Terry, when you look ahead to funding -- the funding situation for the local school districts and states for the third quarter el-hi market, how big a role will the federal government play this year as opposed to last year? Is that up, down, flat or how's it playing out?

I think it's going to be more of the same. I think that obviously we, like you, are watching very carefully how the federal government is implementing some of the Race to the Top Funds and the like. And there should be a federal improvement; that way as more states are pushing for common core standards and the like. But it's obviously a question mark.

If you take people why their direct comments and words the federal portion is going to be higher this year, but we've got to see it. And in some cases you're seeing more implementation on the Race to the Top and some people are still pending on that part. Places like Texas, for example, they're going to be fine on their own. We just have to make sure that they're going to do what they say they're going to do on that one. But I think the federal portion in 2011 should go up based on the comments and statements that have been made, but we've got to see it.

Great, thanks.

Thanks, Doug.

Thank you. And that concludes this morning's call. A PDF version of the presenter's slides is available now for downloading from www.McGraw-Hill.com. A replay of this call will be available in about 2 hours. Please note that a replay of this call, including question and answer, will be maintained on McGraw-Hill's website for 12 months from today and for one month from today by telephone. On behalf of the McGraw-Hill Companies, we thank you for participating and wish you a good day.