Good morning, and welcome to the McGraw Hill Company's Conference Call. I'd 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. To access the webcast and slides, go to www.mcgrawhill.com and click on the link for the 2nd quarter webcast. If you are listening by telephone, please note that there is an option available to synchronize the presenters' slides to your telephone instead of the computer.
After you log on to the guest book, you will see 2 windows side by side in the webcast viewer. Along the bottom of the left hand window, click the gear icon and select Live Phone from the list. A line will appear over the sound icon indicating that found has been disabled through your computer speakers. 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 Company's Q2 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've all had a chance to review the release.
If you need a copy of the release and financial schedules, they can be downloaded at www.mcgrawhill.com. Once again, that's www.mcgrawhill.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 U.
S. 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 Conference 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 and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10 ks, 10 Qs and other periodic reports filed with the U. S. Securities and Exchange Commission. We're aware that we do have some media representatives with us on the call today.
However, this call is intended for investors and 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, Chairman, President and CEO of McGraw Hill Companies. Terry?
Okay. Thank you very much, Chip, and good morning, everyone, and 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. 3 months ago, I was able to share record first quarter earnings. I couldn't be more pleased today to with you our record 2nd 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 production programs. During the Q2, despite revenue that was modestly below a year ago, We delivered adjusted operating profit growth of 14% from both increased revenue 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 So the company remains this on delivering on the growth and value plan. As part of this effort, we continue to progress toward the Creation of 2 powerful new companies, 1 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 Q2. 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 technology and education experience, while Pat brings the financial expertise coupled with a deep knowledge of McGraw Hill given his long Tenure. Both are terrific leaders and I can't say enough about them and the team that we've put in place. The Form 10 registration statement was filed with to the SEC several weeks ago.
Consolidated cost reductions accelerated in the 2nd quarter with total company adjusted expenses decreasing These cost reduction actions and others currently underway keep us on track to delivering at least $100,000,000 in cost savings on a run rate basis by year 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 and P Dow Jones Indices combining 2 iconic brands that will continue to deliver index based solutions for global investors. It It is a very exciting joint venture with a wonderful partner in the CME and should deliver annual revenues in 2013 in its 1st full year of approximately $500,000,000 with great margins. Since the deal closed in late June, the impact on the 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 and 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 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 and P Dow Jones Indices, CMA and Coalition, which I just discussed, we had acquisitions of R As a comprehensive set of integrated initiatives, which includes 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'll go through each of the various business areas. Let me start. McGraw Hill Financial on a pro form a 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 and P Capital IQ and S and P Indices along with Commodities and 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 Q2. Domestic revenue Growth of 7% outpaced international growth of 3%, which was impacted by volatile conditions in Europe and adverse foreign exchange rates. Standard and 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. Sanford's ratings is the largest business segment within McGraw Nearly all of the decrease in international revenue was a 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 the segment would have increased 3 The operating margin was down year over year, but improved versus the Q1. Transaction revenue increased 4% $203,000,000 The key drivers to the increase in transaction revenue were the U. S. Public finance issuance, which Increased 58%.
You may recall that the muni market was adversely impacted back in the Q2 of 2011 by the perceived risk of a wave of to the defaults which did not come to fruition. The U. S. 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, U.
S. Corporate investment grade issuance, which remain resilient and increased 7%. Offsetting this growth was U. S. Corporate speculative grade issuance, which decreased 39% as investments became more risk adverse 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 U. S. 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 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, the ratings business outlook appears very encouraging with numerous secular 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 the 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 with 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. 2 additional cases were dismissed in the second 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, On the regulatory and government front, the ratings business remains an area of focus for regulators both in the United States in Europe, there are 3 principal items that we are monitoring. The first is CRA 3 in Europe. That remain there remains the possibility of a mandatory rotation of rating agencies for structured finance products or a subset of these products. There's 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 Dodd Frank, which requires all U.
S. Regulations be changed to or requirement of reliance on credit ratings. Last is the Franklin 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 creditworthiness.
In In addition, the Civil Division of the Department of Justice and the Division of Enforcement of the Securities and Exchange Commission Our investigating potential violation of civil provisions of federal law regarding and relating to S and 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 ahead of us in the Q3, especially with exchange rate 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 Okay. With that, let me now turn to S and P Capital IQ and S and P Indices, the 2nd largest segment within McGraw Hill Financial. It delivered solid top and bottom line results with revenue and adjusted Profit increasing 10% 17% respectively. Both S and P Capital IQ and S and P Indices delivered year over year revenue growth with 74% of revenue coming from subscriptions the same as a year ago.
Looking at S and P Capital with solid growth at both desktop solutions as well as enterprise solutions. In addition, Both Ratings Express 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 and 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 We have expanded the capabilities for measuring counterparty risk in the S and P Capital IQ platform. S and P Capital IQ 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 Quantaouse are progressing well. We have effectively empowered R2 and Quantaouse to lead our efforts in the development of next generation cross asset class portfolio analytics and low latency data capabilities respectively. S and P Indices revenues increased 12%.
We realized growth in trading volume of exchange traded derivatives as well as in assets under management for both mutual funds and exchange traded funds linked to S and P indices. Despite a turbulent stock market during the quarter, assets under management and exchange traded funds linked The S and P indices increased 7% to $349,000,000,000 This was driven by a 10% increase in the number 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 and P indices were The launch bringing the total of exchange traded funds linked to S&P Indices to 4 At the end of the quarter, we launched the S and 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 Maturi, 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 And ownership of the joint venture, we will for the first time participate in the profitability of CME's execution and clearing. With the S and P Dow Jones Indices Joint Venture now in place, there are approximately $1,500,000,000,000 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 and P Dow Jones Indices is home to some of the most widely followed and most trusted
and the world. Now let
me turn to the Commodities and Commercial Group, which delivered year over year operating profit gains that The change of the business is very evident and along with cost reductions resulted in operating margins that increased almost 7 Descriptions for petroleum, natural gas and steel products drove the 19% increase in revenue. We have capitalized on the acquisitions of BenTech 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 Thanks, Linked to Platts pricing. Our commodities business is now approaching $500,000,000 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 a result of growth in the Power Information Network or PIM, ad claims and 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 claims from many of the companies whose automobiles rank highest in each category. I'm pleased to say J.
D. Power is on its way to It's 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-twelve 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 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 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 $50,000,000 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 U. S. Dollar.
Higher education now has 1,400,000 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 improves student learning. LearnSmart is and 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 Q3 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-twelve 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 test 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 the 2 state led consortia funded by the U. S. 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 2nd federally funded test consortium, which is called the Partnership for Assessment of Readiness for College and Careers. We are setting up We're putting in place the cost structure and digital capabilities necessary for the McGraw Hill Education to lead the 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 to 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 spin off 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. And I'm 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 in 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 in value plan cost reduction initiatives that began in the Q4 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 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 From McGraw Hill Education, while there was a 12% decline in revenue, margins expanded 4 20 basis points based on the meaningful cost initiatives that began with the significant restructuring of the business in the Q4 of last 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 in value plan and the impact was evident again this quarter. Year over year, we reduced shares outstanding by 24,000,000 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 Q2 of 2012. The company has repurchased nearly 36,000,000 shares at a weighted average price of 42 point And $0.05 This reduced shares outstanding by approximately 12%. Apart from the completion of the Accelerate share repurchase program in April, no other shares were repurchased in the quarter. However, we do 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 $840,000,000 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 $100,000,000 to vendors associated with the transition to a new accounting system as well as $65,000,000 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 $750,000,000 excluding cash outlays associated with the growth in value plan remains unchanged.
Now let me provide some additional details around the execution of the growth in value plan. During the quarter, we continued to make and over the last several quarters drove in part the cost reductions that were realized in the second quarter. Year over year total expenses decreased 5%. As I mentioned earlier, one important component of this was the realignment of our U. S.
Pension plan that took effect on April first. As we form 2 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 Q2, we incurred $42,000,000 of one time growth and value plan costs that we noted in this morning's press release. They include $19,000,000 for professional fees, dollars 15,000,000 for deal fees and 8 and expenses necessary to implement the growth and value plan. These one time expenses are largely professional fees as we need the support of 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 and execution initiatives.
While the timing of these actions is still fluid, restructuring expense for 2012 could be up to approximately 60 $5,000,000 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 as substantially all of the cash on hand at at the time of the spin. Concurrent with the spin, we anticipate the McGraw Hill Education will issue up to $600,000,000 in new debt, likely of bank term loans and public debt.
McGraw Hill Education will retain approximately $100,000,000 of cash and issue a one time dividend to McGraw Hill Financial for up to $500,000,000 McGraw Hill Education will also with ample liquidity to meet its business needs. Along with receiving the one time dividend of up to 500,000,000 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 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 out. First, as I mentioned earlier, we plan on resuming share repurchases.
Our plan is to Purchase up to $500,000,000 in the second half of the year. As always, your repurchases are subject to appropriate market conditions. Another item that I want to The financial impact of our new joint venture S and P Dow Jones Indices. The transaction was closed at the end of June and as such Our balance sheet reflects $792,000,000 of additional net assets. It was closed on the last business day in the quarter such 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 attributable to non controlling interest. Obviously, we will review the impact of this exciting new venture with CME once there are operating results to review on the Q3 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 Q3, our largest of the year, is still ahead of us. This is a key quarter for McGraw Hill Education as schools across the U. S. Changed with diluted adjusted earnings per share of $3.25 to $3.35 Although based on the strong first Efforts will continue and we fully expect to deliver on our target of at least $100,000,000 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 2 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 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 and A.
Thank you, Jack. Just a couple And now operator, if you would please, we'll take our first question.
Our first question comes from William Byrd with Lazard. Your line is open.
Good morning. Thank you. Just two questions. First, on a GAAP basis, how much of the $100,000,000 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 Saving. We will realize those cost savings in 2012. And again, Not to be nebulous about it, but we're seeing at least $100,000,000 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'll be more. But I think Safe to say, at this point, at least $100,000,000 is a good way to do it. Leverage in
Sure.
Just let me let me call that. The On a run rate basis absolutely at least $100,000,000 by the Q4. In terms of actual flow through the P and L within 2012, I would say about 2 thirds would flow within the P and L this year. And obviously that the $400,000,000 would benefit both businesses as we go into next year. And again, that Excludes the one time impact of the costs that we highlighted today around the separation expenses.
That's right. And that's and again at least 100,000,000 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 repurchase 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 and L year to date?
Well, if going back to my comment a minute ago that we anticipate at least 2 thirds to benefit the P Within the full year, I would say a little less than half that is already been reflected in the P and L year to date.
And given the conditions that we're 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 4th quarter where We eliminated last year, we eliminated 10% of all positions. That obviously is also adding incremental benefits.
Could you also Comment on just what you're seeing in terms of the ratings pipeline right now?
Yes. I mean, as we said, what we're seeing on the structured finance side, we're Starting to see some pickup on the commercial and a little bit on the residential side. Obviously, the public finance It is quite strong. Bigger than that Bill is that you're looking at in terms of non financial corporate securities over Next 5 years, you're looking at $46,000,000,000,000 of refinancing and new monies on that So we're starting to see some pickup on that side. Obviously, investment grade is doing better than speculative grade.
And that goes both here in Europe and parts of Asia Pacific as well. But It will start to pick up and we will start to see more activity on that part. And the plus sign Is that we're seeing it on the structured finance area.
Great. Thank you.
Our next question comes from Peter Appert with Piper Jaffray. You may ask your question.
Thanks. Good morning. So Perry, the cost growth slowed Considerably at S and 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 In the second half of the year?
Well, I mean, you've got ongoing cost reduction in one area, but you're also rightsizing 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. So we'll have to see how the currency markets play itself through. But we're obviously benefiting on the cost And Peter, I
would just add that looking forward over the balance of the year, as Thierry mentioned in his remarks, we have a tough And expense overlap and particularly in the Q3. So I'd be cautious as we look at the Q3. But on a full year basis, we are our anticipation that our the margins would remain 40% or better on a full year
Got it. Thank you. And could I ask just 2 other questions please? The S and P Dow Jones Index Jack, you mentioned this I think in your part of the call. I'm just trying to figure out how big is the incremental contribution from that in the And then question 2, unrelated to that, Jack, you also mentioned that exploring the possible sale The education business, if you went that route, obviously, you'd be left with considerable cash balances.
How would we how should we think about the potential use of that cash?
Yes. Two quick questions. I mean, for the JV over the balance of the year from an earnings per share Point of view, I think we think it will be accretive a penny or 2. And on the Q3 call, once we actually have Real operating results, we will detail that much more than we can today. And then I'll be honest, we're very focused on trying to determine the right strategic path for the education It's been or potentially sale other options.
If obviously in its sale, we would have a fairly significant Cash infusion, we haven't spent a lot of time quite honestly, Troy, and what we would sort out what we would do with that. Obviously, it's a high class That's an issue for us to consider. I would think you should expect some part of that would be consistent with our return of Capital policy that we have is part of the growth and value plan.
Great. Thank
you. Yes. 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 standalone has taken all the attention on 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 standalone 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 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, especially as we continue to build out on areas like No, I'm not. But also in terms of share repurchase as well.
Great. Thanks, Tarek.
Yes.
Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.
Yes. Good morning. I have a very So the question first. On the transaction line in your Ratings business, given these various city bankruptcies of late And I've noticed a number of downgrades out there as well over the last 6 months or so and increasing numbers. How concerned are you about the public finance market out there?
I know it's Going very strong now given low rates and how easy the comp was year over year. But how concerned are you guys and your analysts that this could materially impact This continues debt issuance on U. S. Finance.
Yes. Well, I mean, it's 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 Percent of the second quarter revenue in all of that. And again, that was a lot to do with the strengthening of the U.
S. Dollar. But we're not I mean, we're all concerned in terms of a lack of growth And some of the economic conditions and all of that, we're all influenced by that. But clearly, you're going to see more public finance issuance on that And it's a critical faith and we're watching it very carefully. And again from a creditworthiness standpoint, we will be Extremely diligent in terms of staying exactly what we see.
But again, this pickup in city bankruptcies out there, you're Overly concerned about what they could do for debt issuance in the muni market for a period of time?
No, we're not overly concerned.
Okay. And 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 tell me what your outlook is there in the back half of the year and also about any potential price increases what you're doing there?
Yes. Well, 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 The strength in the U. S. Dollar is obviously influencing it, but excluding the impact of foreign exchange Great.
We see an increase in the non transaction revenue.
Yes. And our current Forecast assumes sort of low single digit growth in that area over the balance of the year. So obviously to Carey's point currency and then Obviously, how active the markets are on the transaction side will drive the business for the next 6 months.
Yes. That's right. Low single digit Net modest
increases. Back to this other question earlier about the Dow Jones indices JV. Can you ballpark the revenue impact or the positive impact there? Is it roughly say $20,000,000 to you guys on a quarterly basis? Just ballpark it for
us. Todd, I'd put it closer to 25 plus.
Per quarter?
Per quarter. Okay. Yes. So for the balance of the year somewhere between $50,000,000 to $60,000,000
Okay. My last question please. On education, can you just update us on your latest thoughts on the digital migration both LHI as well as college? What you think it actually Profits, profit dollars not margins, not revenue, but the actual profits at the end of the day, the dollar impact please?
Well, that's I mean, that is where it's coming from. And it's 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 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-twelve 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 end and the professional side, It will be a direct contribution.
I think to Spina's point as an example, obviously, it's much smaller because it's not higher ed. But the professional business was Small business, it's our most digitally advanced and we have continued to build profitability in business. So we have some experience in managing through this transition. It will obviously work differently in the education markets in either Higher Ed or K-twelve going forward, but we're working our way through that.
Great. Thank you.
Thanks, Craig.
Our next question comes from Doug Arthur with Evercore. You may ask your question.
Yes. Terry going back to S and P ratings and particularly focusing on transaction revenues. Irrespective of the currency hit, I don't think I've ever seen a quarter where there was such a divergence between U. S. Activity and particularly European.
And I guess that's for the obvious reasons that we all read about every day. But do you How do you see that playing out particularly in Europe over the second half of the year more of the same?
I'd say you're probably right, Doug. It is more of the same. Although, I think you'll start to see a little pickup in the structured finance area On that one and we're 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.
We will now take our final question from David Reynolds with Jefferies. You may ask your question.
Good morning. Yes, David Reynolds here from Jefferies. I wonder if I could just ask a question about to McGraw Hill Education. Clearly, you're 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 and Take a look at the industry serving it. No, on that part. McGraw Hill Education is one of the most comprehensive and most powerful Scaled capabilities and the like. As we're 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're Seeing some fundamental change taking place.
Ours 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're seeing that. I think that our capability and the team that we've got, we've 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 is 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. 2 thirds of world GDP growth is coming from something called emerging and our ability to be able to interface with that and in particular on the professional Higher Ed side is going to be a big component of growth going forward.
That's great. Thanks so much.
Thanks, David.
That concludes this morning's call. A PDF version of The presenter slides is available now for downloading from www.mickerelhill.com. A replay of this call, including the Q and A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill's website for 12 months from today and for 1 month from today by telephone. On behalf of the McGraw Hill Companies, we thank you for participating and wish you a good day.