標普全球 (SPGI) 2012 Q2 法說會逐字稿

Good morning and welcome to The McGraw-Hill Companies conference call. I would like to inform you that this call is being recorded for broadcast and that all participants are on a listen-only mode. We will open the conference to question-and-answers after the presentation and instructions will follow at that time. (Operator Instructions).

I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Good morning. We thank you for joining us this morning at The McGraw-Hill Companies second-quarter 2012 earnings call. I'm Chip Merritt, Vice President of Investor Relations.

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 is www.McGraw-Hill.com.

In today's earnings release and during the conference call, we are providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with US GAAP. The results of the prior-year quarter also reflect the reclassification of the broadcasting group as a discontinued operation.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements.

In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the US Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call today. However, this call is intended for investors. We would ask that questions from the media be directed to Patti Rockenwagner in our New York office at 212-512-3533 subsequent to this call.

Now, I would like to turn the call over to Harold McGraw III, Chairman, President and CEO of McGraw-Hill Companies. Terry?

It okay. Thank you very much, Chip, and good morning, everyone. Welcome to today's conference call. Joining me today on the conference call is Jack Callahan, our Chief Financial Officer. This morning, Jack and I will review our corporate results, provide an update on our Growth and Value Plan progress, provide a detailed look at the segment results that make up what will be McGraw-Hill Financial and McGraw-Hill Education, and then provide an outlook for the balance of the year.

Three months ago, I was able to share record first-quarter earnings. I couldn't be more pleased today to share with you our record second-quarter earnings. What makes these results particularly noteworthy is that they occurred during a period of tremendous volatility in the debt markets as a result of European debt crisis and in a year in which we are experiencing the weakest state funding for textbooks in the past decade. To say the least, our employees are to be commended for delivering these results in today's very challenging global economic environment while simultaneously advancing the separation and implementing major cost reduction programs.

During the second quarter, despite revenue that was modestly below a year ago, we delivered adjusted operating profit growth of 14% from both increased revenue in Commodities & Commercial, S&P Capital IQ, S&P Indices as well as an acceleration of cost reductions that were realized during the quarter.

Our recent aggressive share repurchase program amplified this growth and we delivered 25% adjusted diluted earnings per share growth and Jack will provide additional detail on that in just a moment.

The primary focus of the Company remains on delivering on the Growth and Value Plan. As part of this effort, we continue to progress toward the creation of two powerful new companies, one, McGraw-Hill Education, and the other, McGraw-Hill Financial, and doing so in 2012.

Steady progress has been made on the Growth and Value Plan during the second quarter. Key management has been put in place at McGraw-Hill Education and that includes Buzz Waterhouse as President and CEO, and Pat Milano as CFO and Chief Administrative Officer. Buzz brings a wealth of both technology and education experience while Pat brings the financial expertise coupled with a deep knowledge McGraw-Hill given has long tenure. Both are terrific leaders and I can't say enough about them and the team that we put in place.

The Form 10 Registration Statement was filed with the SEC several weeks ago. Consolidated cost reductions accelerated in the second quarter with total Company adjusted expenses decreasing 5% versus the second quarter of 2011 resulting in an increase in margins. These cost reduction actions and others currently underway keep us on track to delivering at least $100 million in cost savings on a run rate basis by year end.

Also, as part of the Growth and Value Plan, we are working on more than just cost reduction and separations, strategic investments are an important component and we made several during the quarter to accelerate long-term growth. We launched the S&P/Dow Jones Indices, combining two iconic brands that will continue to deliver index based solutions for global investors. It is a very exciting joint venture with a wonderful partner in the CME and should deliver annual revenues in 2013 in its first full year of approximately $0.5 billion with great margins.

Since the deal closed in late June, the impact on the second-quarter earnings was minimal.

We acquired Credit Market Analysis Limited, or CMA, a leading provider of clear, reliable, over-the-counter credit pricing and related information from the CME. This adds another foundational benchmark capability to our portfolio. The business will be reported within S&P Capital IQ.

Our India-based credit rating agency, CRISIL, announced the acquisition of Coalition Development Limited. Coalition provides high-end analytics primarily to global investment banks. It is a London-based company with considerable operations in India.

From a corporate development standpoint, we have been very active in adding new capabilities to the Company, along with S&P/Dow Jones Indices, CMA and Coalition, which I just discussed, we had acquisitions of R2 and QuantHouse earlier this year, both in S&P Capital IQ.

Overall, the Growth and Value Plan is a comprehensive set of integrated initiatives which include separation, cost reduction, share repurchases as well as funding both organic growth and tuck-in acquisitions. I am pleased with the progress so far this year and I'm excited about the prospects for the future of both companies as we complete this process.

With that, let me turn to the business results and I will go through each of the various business areas. Let me start, McGraw-Hill Financial on a pro forma basis delivered a 5% increase in revenue and a 9% increase in adjusted operating profit during the quarter. While all three segments delivered revenue growth, it was S&P Capital IQ and S&P Indices, along with Commodities & Commercial that provided the operating profit growth. Cost reduction benefits were realized across all segments.

McGraw-Hill Financial derived 40% of its revenues from outside the United States during the second quarter. Domestic revenue growth of 7% outpaced International growth of 3% which was impacted by volatile conditions in Europe and adverse foreign exchange rates.

Standard & Poor's Ratings continues to be the segment with the largest international presence in terms of dollars with 46% of revenue coming from outside the United States. Standard & Poor's Ratings is the largest business segment within McGraw-Hill Financial. Revenue for the segment grew 1% with a 7% increase in domestic revenue and a 6% decrease in International revenue. Nearly all of the decrease in International revenue was the result of foreign exchange rates. However, these rate changes had a negligible impact on operating profit.

Excluding the impact of foreign exchange rates, total revenue for this segment would have increased 3%. The operating margin was down year-over-year but improved versus the first quarter.

Transaction revenue increased 4% to $203 million. The key drivers to the increase in transaction revenue were the US public finance issuance which increased 58%. You may recall that the muni market was adversely impacted back in the second quarter of 2011 by the perceived risk of a wave of muni defaults which did not come to fruition.

The US structured finance issuance which increased 22% due to the growth in asset-backed securities and also CLOs, collateralized loan obligations. It is certainly encouraging to see the growth in Structured Products and we look for that to continue.

US corporate investment-grade issuance which remained resilient had increased 7%. Offsetting this growth was US corporate speculative grade issuance which decreased 39% as investments became more risk-averse, European corporate issuance which decreased 36% and European structured finance issuance which decreased 60%.

Non-transaction revenue, which represents 58% of second-quarter revenue decreased 2% primarily due to the strengthening US dollar. Excluding the impact of foreign exchange rates, non-transaction revenue increased 2%.

It is becoming increasingly apparent that global debt issuance trends are diverging. While trends in the United States are increasingly encouraging, the picture in Europe continues to be quite volatile. With the exception of strong issuance in January and February as a result of the injection of liquidity into the Eurozone banking system by the ECB, issuance activity has been rather subdued. However, over the long term, Ratings business outlook appears very encouraging with numerous secular drivers of growth including a large pipeline of maturing global corporate debt that will need to be refinanced, the shift in Europe from bank loans to public debt markets as banks face new regulations as well as capital requirements.

And finally, the structured finance market, which should recover with improved activity in the residential and commercial real estate markets. However, there are a number of issues that continue to create considerable volatility and these include the European financial crisis, risk aversion among some investors, sovereign debt levels, and pending government regulations, which create uncertainty.

Our success on the litigation front has been encouraging. The trends that we have discussed in the past quarterly conference calls continue. Two additional cases were dismissed in the second quarter bringing the total dismissed to date at 29 cases. Seven dismissals by lower courts have been affirmed by higher courts and 10 cases have been voluntarily withdrawn.

Among the dismissals was the Oddo litigation which was affirmed by the highest court in New York. Several dozen cases remain outstanding. We continue to believe that the legal risk of pending litigation remains low.

On the regulatory and government front, the Ratings business remains an area of focus for regulators both in the United States and Europe. There are three principal items that we are monitoring. The first is CRA 3 in Europe. That remains -- there remains the possibility of a mandatory rotation of the rating agencies for structured finance products or a subset of these products. There is also a proposal for a new EU wide liability standard enabling investors who purchase investments to sue a credit rating agency that breaches the EU regulations intentionally or through gross negligence.

Next is a Dodd-Frank, which requires all US regulations be changed to remove any reference to or requirement of reliance on credit ratings.

Last is the Franken amendment, which is being studied by the SEC. This amendment recommends establishing an organization to assign which NRSRO will provide the initial rating on each new structured finance product.

As new regulations are considered in the global markets that we serve, we will continue to provide investors with high-quality, forward-looking opinions about credit worthiness.

In addition, the Civil Division of the Department of Justice and the Division of Enforcement of the Securities and Exchange Commission are investigating potential violation of civil provisions of federal law regarding and relating to S&P's Ratings of structured products. Of course, we have been in discussions with representatives of both the DOJ and the SEC and presenting our position on those issues.

The Ratings segment is now past its toughest revenue comparisons of the year, although we have a difficult expense comparison ahead of us in the third quarter especially with exchange rates issues. With the investments that we have made in the business, along with our repositioning of our commercial mortgage-backed securities offering, we continue to work towards improved performance of this very, very important business.

Okay. With that, let me now turn to S&P Capital IQ and S&P Indices, the second-largest segment within McGraw-Hill Financial. It delivered solid top and bottom line results with revenue and adjusted operating profit increasing 10% and 17% respectively. Both S&P Capital IQ and S&P Indices delivered year-over-year revenue growth with 74% of revenue coming from subscriptions, the same as a year ago.

Looking at S&P Capital IQ alone, revenue increased 9%. A key driver of this growth was double-digit growth in S&P Capital IQ subscriptions with solid growth at both Desktop Solutions as well as Enterprise Solutions. In addition, both RatingsXpress and Global Credit Portal contributed to the growth.

And as I mentioned earlier during the quarter, we acquired Credit Market Analysis, or CMA, and with CMA we significantly expanded our asset class coverage for data and pricing and added technology to move into live intraday coverage of derivatives and other over-the-counter securities.

We are continuously working to upgrade the S&P Capital IQ platform and there have been a number of new products and capabilities that have been launched recently. One that I would like to touch on briefly is in the area of counterparty risk. We have expanded the capabilities for measuring counterparty risk in the S&P Capital IQ platform. S&P Capital IQ Credit analytics offers new capabilities for clients to produce even more dynamic risk measures to support their counterparty analysis. With new and enhanced features for Credit Model, Credit Pro and Credit Risk Tracker products, clients can stay on top of market movements in the credit risk space quickly and efficiently.

And lastly, the integration of our recent acquisitions of R2 and QuantHouse are progressing well. We have effectively empowered R2 and QuantHouse to lead our efforts in the development of next-generation cross asset class portfolio analytics and low latency data capabilities, respectively.

S&P Indices, revenues increased 12%. We realized growth and trading volume of exchange traded derivatives as well as in assets under management for both mutual funds and exchange traded funds linked to S&P Indices. Despite a turbulent stock market during the quarter, assets under management in exchange traded funds linked to S&P Indices increased 7% to $349 billion. This was driven by a 10% increase in the number of exchange traded fund units which more than offset a decline in the net asset value per unit.

During the quarter, 17 brand-new indices and 27 variants to existing indices were launched. Also during the quarter, 11 new exchange traded funds linked to S&P Indices were launched bringing the total of exchange traded funds linked to S&P Indices to 430. These additions create new alternatives for investors and greater liquidity obviously to markets.

At the end of the quarter, we launched the S&P/Dow Jones Indices. This is our new joint venture with the CME Group. Here you can see the full-page ad that ran in the Financial Times and The Wall Street Journal announcing the launch. Alex Matturri, a veteran of the Index industry who has been running our Index business for a number of years, was named the CEO of S&P/Dow Jones Indices. This joint venture will enable our clients to create investment products that offer new choices to investors. As a result of our 73% ownership of the joint venture, we will for the first time participate in the profitability of CME's execution and clearing.

With the S&P/Dow Jones Indices joint venture now in place, there are approximately $1.5 trillion directly linked to our indices and over 400 financial institutions that use our indices to build or price funds, swaps, notes, options, forwards and futures. We are proud that the S&P/Dow Jones Indices is home to some of the most widely followed and most trusted indices in the world.

Now let me turn to the Commodities & Commercial Group, which delivered year-over-year operating profit gains that led all segments. Revenue growth was 9% with International revenue up 16%. The leverage of the business is very evident and along with cost reductions resulted in operating margins that increased almost 700 basis points to over 29%.

Within Commodities, subscriptions for petroleum, natural gas and steel products drove the 19% increase in revenue. We have capitalized on the acquisitions of BENTEK Energy and the Steel Business Briefing Group, to take advantage of cross-selling opportunities. In addition, due to volatility in the oil markets, we realized revenue growth from increased trading of future contracts linked to Platts pricing. Our Commodities business is now approaching a $0.5 billion on an annualized basis and is poised for further growth.

Commercials revenue decreased 1%. J.D. Power's revenue growth was offset by modest declines in the remainder of the portfolio. The revenue growth at J.D. Power was the result of growth in the Power Information Network, for PIN, ad claims and syndicated reports.

The widely followed J.D. Power Initial Quality Study was released this quarter. In its 26th year, the study is purchased by virtually all of the world's major automotive manufacturers and results in meaningful ad claims from many of the companies whose automobiles rank highest in each category. I am pleased to say J.D. Power is on its way to its best year ever. Okay.

With that, let me turn to Education and McGraw-Hill Education. McGraw-Hill Education reported a 12% decline in revenue, yet delivered a 36% increase in segment operating profit. The revenue decline occurred largely at School Education Group. We continue to expect a 10% decline in the K-12 market this year, which will represent in our opinion, the lowest spending level in over a decade and gives us opportunities looking ahead.

Despite this difficult market, the segment delivered cost reductions that overcame the revenue shortfall, enabled us to deliver solid growth in operating profit. Our focus is to ensure that the business has a cost structure that is appropriate for such challenging market realities and provides the flexibility to invest to accelerate digital development.

Product development continues to focus on providing innovative digital learning materials for our customers. As a result of the increased sales of digital products, many of which are subscription-based, our deferred revenue has become more pronounced, increasing by approximately $50 million year-over-year.

The Higher Education, Professional and International Group reported a 2% decrease in revenue. Revenue growth at Higher Education was offset by declines at International which was almost entirely due to a stronger US dollar. Higher Education now has 1.4 million digital users, an increase of 40%, as digital products continue to displace books.

One noteworthy product, McGraw-Hill Connect, which is a homework management platform, grew by 65%. It enables instructors to create assignments and track student performance and provides a range of digital learning tools such as LearnSmart that improve student learning. LearnSmart is an adaptive learning system that is available for approximately 150 different college course titles.

The School Education Group reported a 20% decline and that was in revenue from the prior year with decreases occurring in both instructional materials and testing.

The key third-quarter selling season is underway and our view of the market, as I said a moment ago, remains unchanged. We continue to believe 2012 will be the low watermark in the K-12 space and the market should begin to show a modest recovery as we get into 2013.

Over the next couple of years, we anticipate that demand for our Common Core compliant materials will increase as school districts prepare for the new tests that take effect in the spring of 2015. 46 states have adopted the Common Core State Standards and need to prepare their students for these new tests.

Our testing business was selected by the Smarter Balanced Assessment Consortium to develop its suite of language arts and mathematics test items for the new Common Core assessments. Smarter Balanced is one of two state-led consortia funded by the US Department of Education to develop assessment tools to help states gauge student progress towards meeting the new Common Core standards.

Together, with a co-contractor, we are also developing test items for the second federally funded Test Consortium which is called the Partnership Reassessment of Readiness for College and Careers.

We are setting up the Education business to thrive as a standalone Company. We are putting in place the cost structure and digital capabilities necessary for the McGraw-Hill Education to lead the transformation of the industry and we are absolutely thrilled to have Buzz Waterhouse and Pat Milano in place to lead this effort along with the entire team.

In summary, The McGraw-Hill Companies is off to a very strong start with record first-half adjusted diluted earnings per share. McGraw-Hill Financial should continue to deliver solid top and bottom line growth. We continue to build new capabilities to deliver organic growth while pursuing bolt-on acquisitions to add additional expertise and capabilities, or move into new markets.

McGraw-Hill Education will focus on all that is required to become a standalone Company. We are creating a cost structure that is right-sized to serve the education market and building out our unique set of digital products to meet the needs of our customers. Our intent is to position this business for longer-term growth as the market recovers and the digital shift accelerates.

The Company will remain focused on delivering on its Growth and Value Plan and continue to work towards the completion of the spinoff of McGraw-Hill Education by the end of the year.

And to say the least, 2012 will be remembered as a very important inflection point in our Company's history. I am very pleased with the results of both the first and now the second quarter record results.

Okay. Let me leave it there. That completes my prepared remarks and I will now ask Jack Callahan, our Chief Financial Officer, to update you on some of our key financials. Jack?

Thank you, Terry. This morning I want to provide additional detail on our consolidated results, including cash flow, and provide additional detail on the progress and one-time costs in the implementation of the Growth and Value Plan.

Let me begin by discussing our consolidated results. Revenue decreased 1% year-over-year. However, it was more than offset by a 5% year-over-year decrease in overall adjusted expenses. The decrease in expenses was primarily the result of the Growth and Value Plan cost reduction initiatives that began in the fourth quarter of 2011 and will continue into next year. As a result, consolidated adjusted operating profit increased 14% and consolidated adjusted operating margins increased over 300 basis points to 26.3%. Obviously, we are pleased with the progress thus far in margin expansion.

To summarize the operating results Terry just reviewed, there was continued revenue growth at McGraw-Hill Financial of 5% with margins that expanded 140 basis points delivering strong adjusted operating profit growth of 9%.

For McGraw-Hill Education, while there was a 12% decline in revenue, margins expanded 420 basis points based on the meaningful cost initiatives that began with the significant restructuring of the business in the fourth-quarter of last year. Both businesses did benefit from a reduction in employee-related costs due to the realignment of our retirement programs.

The share repurchase program remains an important aspect of the Growth and Value Plan and the impact was evident again this quarter. Year-over-year, we reduced shares outstanding by 24 million shares. This amplified a 15% increase in adjusted net income to a 25% increase in adjusted diluted earnings per share, or $0.85 per share.

Since the beginning of 2011 through the second quarter of 2012, the Company has repurchased nearly 36 million shares at a weighted average price of $42.05. This reduced shares outstanding by approximately 12%.

Apart from the completion of the accelerated share repurchase program in April, no other shares were repurchased in the quarter. However, we do anticipate resuming share repurchases over the back half of the year which will provide continued EPS leverage into next year.

We continue to have a very strong balance sheet with approximately $840 million in cash and short-term investments. Year over year, our free cash flow was down. This decrease was largely the result of a temporary acceleration of payments of approximately $100 million to vendors associated with the transition to a new accounting system as well as $65 million of cash outlays associated with the Growth and Value Plan.

On a full-year basis, we fully expect to deliver solid free cash flow. Our guidance of approximately $750 million excluding cash outlays associated with the Growth and Value Plan remains unchanged.

Now let me provide some additional details around the execution of the Growth and Value Plan. During the quarter, we continued to make progress on our target of at least $100 million in run rate cost savings by the end of 2012. The actions taken over the last several quarters drove in part the cost reductions that were realized in the second quarter. Year-over-year total adjusted expenses decreased 5%. As I mentioned earlier, one important component of this was the realignment of our US pension plan that took effect on April 1.

As we form to new companies, we need to separate several critical support operations that are currently shared. The next important round of cost savings will benefit from the realignment of these operations. We currently have 15 work streams underway to implement cost savings in the area of accounting, purchasing, information technology, human resources and real estate. We are already deep in the implementation of these plans and we anticipate the realization of these cost reduction benefits by the time separation occurs in the latter part of this year.

During the second quarter, we incurred $42 million of one-time Growth and Value Plan costs that we noted in this morning's press release. They include $19 million for professional fees, $15 million for deal fees and $8 million for severance. We anticipate that for the remainder of the year we will incur an additional $80 million of one-time separation expenses necessary to implement the Growth and Value Plan. These one-time expenses are largely professional fees as we need to support the various consultants, business process and information technology firms and financial advisors. Please keep in mind this is a working estimate.

In addition, we anticipate that during 2012 we will continue to incur restructuring costs as part of our ongoing cost reduction initiatives. While the timing of these actions is still fluid, restructuring expense for 2012 could be up to approximately $65 million over the balance of the year.

The Form 10 was filed several weeks ago and outlined many aspects of the separation. There are a few key financial items that I would like to draw your attention to.

McGraw-Hill Financial will retain all of the outstanding long-term debt as well substantially all of the cash on hand at the time of the spin. Concurrent with the spin, we anticipate that McGraw-Hill Education will issue up to $600 million in new debt, likely a mix of bank, term loans, and public debt. McGraw-Hill Education will retain approximately $100 million of cash and issue a one-time dividend to McGraw-Hill Financial for up to $500 million.

McGraw-Hill Education will also establish a revolving credit line. This along with $100 million of newly raised cash should provide McGraw-Hill Education with ample liquidity to meet its business needs.

Along with receiving the one-time dividend of up to $500 million, McGraw-Hill Financial will retain all of the pension liabilities which are now largely frozen plans for both companies as well as other selected liabilities to simplify separation.

In the spin, our goal is to provide the Education business with balance sheet flexibility to support its long-term growth potential.

As we now look to the back half of the year, there are a couple of items that I want to point now. First, as I mentioned earlier, we plan on resuming share repurchases. Our plan is to repurchase up to $500 million in the second half of the year; as always, share repurchases are subject to appropriate market conditions.

Another item that I want to highlight is the financial impact of our new joint venture, S&P/Dow Jones Indices. The transaction was closed at the end of June and as such, our balance sheet reflects $792 million of additional net assets. It was closed on the last business day in the quarter such that the income statement impact was negligible. We anticipate that by the end of the third quarter, the net income attributable to non-controlling interest line on the income statement will become more prominent.

Since we own 73% of the joint venture, we will consolidate the entire business in our income statement. 27% of the joint venture net income is then removed and recorded as net income attribute to non-controlling interest. Obviously, we will review the impact of this exciting new venture with CME once they are operating results to review on the third-quarter call.

In closing, our outlook for the balance of 2012 remains positive. We are executing upon the Growth and Value Plan that we laid out late last year. At the same time, we delivered record first-half adjusted earnings per share.

While there is an inclination to raise guidance after such a strong first half, we need to be mindful that the third quarter, our largest of the year, is still ahead of us. This is the key quarter for McGraw-Hill Education as schools across the US purchase the lion's share of educational materials for the upcoming school year. Therefore, we believe it is prudent to keep our guidance unchanged with diluted adjusted earnings per share of $3.25 to $3.35. Although based on the strong first half, we now anticipate being near the high end of that range.

Our cost reduction efforts will continue and we fully expect to deliver on our target of a least $100 million in run rate cost savings by the end of the year. Executing on all the aspects of the Growth and Value Plan remains our highest priority and we continue to anticipate completing the separation into two powerful industry leaders, McGraw-Hill Education and McGraw-Hill Financial by year end.

We are doing all the work to support a spin of McGraw-Hill Education by year end. We are also evaluating other options to deliver shareholder value including a potential sale. We will update the market as appropriate in the coming months.

With that, thank you for joining the call this morning and now let me turn the call back over to Chip Merritt to moderate the Q&A.

Thank you, Jack. Just a couple of instructions for our phone participants. (Operator Instructions). And now, operator, if you would please, we will take our first question.

William Bird, Lazard.

Good morning. Thank you. Two questions. First, on a GAAP basis, how much of the $100 million in cost savings do you expect to fall in 2012? And second, about how much leverage are you comfortable with for McGraw-Hill Financial post spin? Thanks.

Well, Bill -- good morning, Bill. First of all, in terms of the cost savings and in terms of being able to realize those savings, we will realize those cost savings in 2012. And again, not to be nebulous about it, but we are seeing at least $100 million. We believe as we go through all of the reductions in shared costs and all of those things as we go through the separation process, that there will be more.

But I think it is safe to say at this point at least $100 million is a good way to do it. Leverage (multiple speakers)

I'm sorry (inaudible) on a run rate base absolutely at least $100 million by the fourth quarter. In terms of actual flow through the P&L, within 2012, I would say about two-thirds would flow within the P&L this year and obviously, the full $100 million would benefit both businesses as we go into next year. And again, that excludes the one-time impact of the cost that we highlighted today around the separation expenses.

That's right, and again, at least $100 million. And also, in terms of leverage, it's way too early to tell at this point. I mean obviously we've got a very clean balance sheet and relative to an organic growth projects, transactions, shares repurchased and things like that, we will have ample capability to do whatever we need to do on that part. So we have a very clean balance sheet.

And just to clarify on the cost saves, how much have you realized in the P&L year-to-date?

Well, going back to my comment a minute ago that we anticipate that at least two-thirds to benefit the P&L within the full year. I would say a little less than half that has already been reflected in the P&L year-to-date.

And given the conditions that we are facing at this point, obviously in terms of some of the lower revenue growth and higher profit growth, obviously cost reductions are having a significant impact.

Great, thank you.

And obviously we're also benefiting from the Education business is obviously benefiting from the very significant cost restructuring they did in the fourth quarter, where we basically -- we eliminated -- last year, we eliminated 10% of all positions. That obviously is also adding incremental benefit.

Could you also comment on just what you are seeing in terms of the ratings pipeline right now?

Yes, I mean as we said, what we are seeing on the structured finance side we are starting to see some pickup on the commercial and a little bit on the residential side. Obviously the public finance market is quite strong. You know, bigger than that, Bill, is that you are looking at in terms of nonfinancial corporate securities over the next five years, you are looking at $46 trillion of refinancing and new monies on that part. So we are starting to see some pickup on that side.

Obviously, investment grade is doing better than speculative grade. That goes for both here and Europe and parts of Asia Pacific as well. But, no, it will start to pick up and we will start to see more activity on that part and the plus sign is that we are seeing it on the structured finance area.

Great, thank you.

Peter Appert, Piper Jaffray.

Thanks. Good morning. So, Terry, the cost growth slowed considerably at S&P in the second quarter which helped you generate some pretty good margins in the context of the tough revenue environment. Should that pattern replay you think in the second half of the year?

Well, I mean you've got ongoing cost reductions in one area but you're also right-sizing a little bit but the big area is the foreign exchange. Again, especially coming out of Europe, revenues are impacted by foreign exchange, but also positively the expense base is also affected that way you know.

So we will have to see how the currency markets play itself through, but we are obviously benefiting on the cost side with foreign exchange.

And, Peter, I would just add that looking forward over the balance of the year, as Terry mentioned in his remarks, we have a tough expense overlap particularly in the third quarter. So I would be cautious -- we are cautious as we look at the third quarter. But on a full-year basis, you know, we are -- our anticipation is that the margins would remain 40% or better.

Okay.

On a full-year basis.

Got it. Thank you. And could I ask just two other questions please? The S&P Dow Jones Index business, Jack, you mentioned this I think in your part of the call. I am just trying to figure out how big is the incremental contribution from that in the second half of the year? That is question one.

And then question two, unrelated to that, Jack, you also mentioned exploring the possible sale of the Education business. If you went that route, obviously you would be left with considerable cash balances. How should we think about the potential use of that cash?

Two great questions. I mean for the JV over the balance of the year, from an earnings per share point of view, we think it will be accretive a penny or two. And on the third quarter call, once we actually have real operating results, we will detail that much more than we can today.

And then I will be honest, we are very focused on trying to determine the right strategic path for the Education business, spin or potentially sale or other options. If obviously in the sale we would have a fairly significant cash infusion, we haven't spent a lot of time, quite honestly, trying to sort out what would we do with that. Obviously it is a high-class issue for us to consider.

I think you should expect some part of that would be consistent with our return of capital policy that we have as part of the Growth and Value Plan.

Great, thank you.

And, obviously, again we're in a very, very sensitive period with the Education business, because we have to make sure that we are prepared for the spin and we are. And standing up the Education business as a stand-alone has taken all the attention on that part. Obviously being responsive as a public company to every other interest as well, we are going through a process on that as well.

But the most important part is that this is a 2012 event and that it is going to be a stand-alone business and we have to make sure that in every possible way that it is capable of being able to deliver on its strategic mission.

Now, in terms of -- as Jack said, proceeds and everything else, you can look at the key components. It will definitely have some transaction component to it. It will definitely have some organic specialty as we continue to build out on areas like Platts and S&P/Dow Jones Indices and things like that. Also the geographic expansion net ratings on that but also in terms of share repurchase as well.

Great. Thanks, Terry.

Craig Huber, Huber Research Partners.

Yes, good morning. I have a very specific question first. On the transaction line in your Ratings business, you've given these various city bankruptcies of late and I've noticed a number of downgrades out there as well over the last six months of so, an increasing number. How concerned are you about the public finance market out there? I know it is going very strong now given low rates, and easy the comp was year-over-year. But how concerned are you guys and your analysts that this could materially impact if this continues debt issuance on US finance?

Yes, well, you know, it is very strong for a very good reason. I mean you've got so many states that are having difficulties, and as we were saying, non-transaction revenue represented 58% of the second-quarter revenue and all of that. And again, that was a lot to do with the strengthening of the US dollar

But we are not -- I mean we are all concerned in terms of a lack of growth and some of the economic conditions and all of that. We are all influenced by that, but clearly you're going to see more public finance issuance on that one, and it's a critical phase and we are watching it very carefully. And again from a credit worthiness standpoint, we will be extremely diligent in terms of stating exactly what we see.

But again, this pickup in city bankruptcies out there, you're not overly concerned of what that could do for debt issuance in that -- the muni market for a period of time?

No, we are not overly concerned.

Okay, and also on the non-transaction line for the entire Ratings business, can you just talk about -- I know it was up here 2% in the quarter, adjusting for currency. But just how your outlook is there in the back half of the year and also about any potential price increases what you are doing there?

Well, yes, I mean again from our standpoint, it would be modest price increases but again, what you really have to focus on is the currency side of it. The strengthening US dollar is obviously influencing it but excluding the impact of foreign exchange rate, we see an increase in the non-transaction revenue.

Yes, our current forecast assumes sort of low single-digit growth in that area over the balance of the year. So, obviously, to Terry's point, currency and then obviously how active the markets are on the transaction side will drive the business for the next six months.

That's right. Low single-digit, net modest increases.

Back to the other question earlier about the Dow Jones Indices JV, can you ballpark the revenue impact there, the positive impact there? Is it roughly say $20 million to you guys on a quarterly basis? Can you just ballpark it for us?

I would put it closer to $25 million plus.

Per quarter?

Per quarter.

Okay. My last --

So for the balance of the year, somewhere between $50 million to $60 million.

Okay, my last question please. On Education, can you just update us on your latest thoughts on the digital migration of [L High] as well as college, what you think that actually means to your profits, profit dollars, not margins? Not revenues, what the actual profits at the end of the day, the dollar impact, please?

Well, that say -- I mean that is where it is coming from. And it is happening very, very rapidly and in particular at the higher education level. As you know, with some of the transformation, with the Apple partnership and things like that, both Professional and Higher Education have significant title expansion in that area, and that will flow this year and next year to increases on the profitability.

The K-12 area is still one that is very fragmented. We have pushed very hard on the high school market in terms of new title capabilities and the like, but again, because of state and local municipality economic conditions, it will remain fragmented but the Higher Ed and the Professional side, it will be a direct contribution.

(inaudible) point as an example, obviously it is much smaller because it's not Higher Ed but on the Professional business, while it is a small business, it is our most digitally advanced, and we have continued to build profitability in that business. So we have some experience in managing through this transition and it will obviously work differently and the Education markets in either Higher Ed or a K-12 going forward, but we are working our way through that.

Great, thank you.

Doug Arthur, Evercore.

Yes, Terry, going back to S&P Ratings and particularly focusing on transaction revenues, irrespective of the currency hit, I don't think I have ever seen a quarter where there was such a divergence between US activity and particularly European. And I guess that is for the obvious reasons that we all read about every day. But do you -- how do you see that playing out or particularly in Europe over the second half of the year, more of the same?

I would say you're probably right, Doug. It is more of the same, although I think you will start to see a little pickup in the structured finance area on that one, and we are looking to that. But again, the European environment is so difficult right now. I would say that it would probably be more of the same.

Okay, great. Thank you.

David Reynolds, Jefferies.

Morning, yes, David Reynolds here from Jefferies. I wonder if I could just ask a question about McGraw-Hill Education. Clearly you are pursuing a variety of strategic options for the business going forward. Perhaps you could just share your expertise with us really with regard to how do you think about valuation for businesses like McGraw-Hill Education?

Well, first of all, if you take a look at the overall appetite and the need and the criticality of it. And the second one, take a look at the industries serving it, on that part. McGraw-Hill Education is one of the most comprehensive and most powerful scaled capabilities. As we are going through some very, very interesting changes in terms of the digital composition and how education is being focused on both at the higher education and at the advanced level, as well as in the elementary, secondary school area, you are seeing some fundamental change taking place.

Ours is is that with McGraw-Hill Education, the digital transformation, has to be accelerated. We have to continue to push aggressively on that, and as an industry, you are seeing that. I think that our capability and the team that we have got we have been able to demonstrate making that kind of change more rapidly. And I think that judgment of anybody in the industry is going to be on their ability to develop digital product very, very quickly and comprehensively.

And could I just follow that up? How critical do you believe is the internationalization of your Education business strategically going forward?

I think it's very important. And especially when you're talking about emerging markets. Two-thirds of world GDP growth is coming from something called emerging markets and our ability to be able to interface with that and in particular on the Professional and Higher Ed side, it's going to be a big component of growth going forward.

That's great. Thanks so much.

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 including the Q&A session will be available in about two hours. The replay 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 good day.