Good morning, and welcome to the McGraw Hill Company's 4th Quarter 2010 Earnings Call. I'd like to inform you that the call is being recorded for broadcast and that all participants are in a listen only mode. We will open the conference to questions and answers after presentation and instructions will follow at that time. To access the webcast and slides, go to www dotmcgrawhill.com and click on the link to the earnings announcement conference call. At the bottom of the webcast page are 3 links.
If you are listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select either Windows Media or Real I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for The McGraw Hill Company. Sir, you may begin.
Thank you, and good morning to our global audience, and Thank you, everyone, for joining us for The McGraw Hill Company's 4th quarter 2010 earnings call. I'm Donald Rubin, Senior Vice President, With me today are Harold McGraw, Chairman, President and CEO and Jack Callahan, Executive Vice President and Chief Financial This morning, we issued a news release with our 4th quarter results. We trust you've all had a chance to review the release. If you need a copy of the release and the financial www.mcraw hill.com. In today's earnings release and during the conference call, we are providing adjusted earnings Share, operating profit and corporate expense information.
This information is provided to enable investors to make meaningful comparison of the company's operating performance between periods and to view the company's business from the same perspective as management's. The earnings release contains exhibits that Reconcile the differences between the non GAAP measures and comparable financial measures calculated in accordance with U. S. GAAP. Before we Begin, I also need to provide certain cautionary remarks about forward looking statements.
Except for historical information, the matters discussed in the teleconference may Certainties 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 10ks, 10 Qs and other periodic reports filed with the U. S. Securities and Exchange We are aware that we do have some media representatives with us on the call. However, this call is for investors and we would ask The first question comes from the media.
We directed to Jason Feuchtwanger in our New York office at area code 21251 It's now my pleasure to introduce the Chairman, President and CEO of The McGraw Hill Companies, Terry McGraw.
Okay. Thank you He joined the company in early December, and we're obviously so pleased to have him on board. This morning, we will be reviewing the 4th quarter 2010 earnings and prospects for the McGraw Hill Companies in 2011. Following my presentation, Jack will review our financials. And after our presentation, we will obviously be pleased to answer any questions, take any Comments that you have about the McGraw Hill Companies.
Earlier this morning, we were pleased to announce Q4 2010 results and provide guidance Wrapping our 2010 results, we reported 4th quarter diluted earnings per share of $0.50 $2.65 for the year. On an basis, 4th quarter earnings grew by 7.8 percent to $0.55 compared to $0.51 last $0.02 for the full year. Excluding the impact of acquisitions and divestitures, revenue in 20 10 increased by 5.3 percent and that took it up to $6,200,000,000 To speed the flow of information and increase Transparency for the investment community, we added several new exhibits to the 4th quarter earnings release, including Consolidated balance sheet and cash flow statements to reflect the previously announced realignment of financial services, we also provided quarterly 2 This chart Illustrates the recasted revenue and operating profit contributions of each of the 4 segments in 2010. By forming McGraw Hill Financial as a 4th segment, we have created a $1,000,000,000 plus business that re produced 19% of our 2010 revenue and 20% of our adjusted segment operating profit. The establishment of McGraw Hill Financial, under the leadership of Lou Eccleston, is the realization of a strategic concept that we began testing in 2 structure across vertical businesses to integrate core capabilities.
By creating the new segment, we have brought together A powerful portfolio of assets that were previously managed vertically, but strong and successful business With a new ability to deliver a broad and deep suite of products for investors across asset classes, McGraw Hill Financial is positioned to With core capabilities, McGraw Hill Financial will leverage content, datasets, analytics and technology in a coordinated framework for launching new products and services. To help realize the strategic concept, Lew Eccleston reorganized the products and services from S The units representing the new integrated product capabilities are the following: 1, enterprise In this chart, you can see how products and services are now aligned in the McGraw Hill Financial segment. 1st, Enterprise Solutions is all about leveraging data, comprehensive access and efficient delivery of critical content. Through enterprise solutions, clients will be able to access efficiently all of McGraw Hill Financial Objectively and transparently for a growing range of asset classes. 3rd, research and analytics leverages proprietary data Cross asset class analytics, commentary, research and technology to develop market analysis And investment insight for institutional and private wealth management clients.
And finally, integrated workflow tools will enable integrated desktop solutions to create packages of comprehensive fundamental and quantitative research and analysis for investment figuration, McGraw Hill Financial is a $1,200,000,000 plus business at the end of 2010 with an operating is predominantly a subscription business. Revenues from subscriptions produced about 74 percent of 20.10 revenue, about 70% of revenue came from domestic sources in 2010 with international revenue In foreign markets, as recasted, McGraw Hill Financial turned in its best performance in 2010 There was $300,300,000,000 under management at the end of 2010 and these would be And exchange traded funds based on the S and P indices. In 2010, the number of exchange traded funds based on S and P indices increased by 90 Capital IQ experienced significant client growth, finishing 2010 with more than 3,400 And that's an increase of 15.8 percent for the year. The integration of the markets.com continues smoothly. It will be a Strong addition to our integrated desktop platform for this year.
So let's sum up for McGraw Hill Financial. With Building at the end of 2010 and promising market conditions in 2011, we believe McGraw Hill Financials should get off To a good start this year. Our expectations, strong organic growth and the acquisition of markets.com Should produce low double digit revenue and operating profit growth in 2011. Now let's review the performance of Standard and Poor's, Our ratings business and the new four segment alignment. Standard and Poor's had a solid year and a strong finish 2010 increased by 10.3 percent to $1,700,000,000 and adjusted operating profit grew by 6.5 percent to $755,100,000 The adjusted operating margin was 44.5 percent, down 100 60 basis points from 2,009.
S and P is seeing the strongest activity in key markets since 2000 and 7, as worldwide corporate high yield new dollar volume and U. S. Public finance issuance Set new records in 2010. The previous annual and quarterly records for worldwide high yield dollar volume issuance were set in 2,007, but 2010 easily topped them. Issuance $381,400,000,000 in 2010 compares to $243,500,000,000 in 2,007.
In the Q4 of 2010, there was $120,500,000,000 of worldwide high yield issuance compared to the previous Quarterly record of $106,000,000,000 in the Q2 of 2,007. The need for refinancing, tightening Spreads and investors' appetite for yield spurred activity in a great market. As this table shows, S and P's high yield composite Spread, obviously the excess interest rate over treasury bonds, has been tightening since July and closed the year at 5.40 The investment grade composite spread also gradually tightened since July and ended 2010 at 178 U. S. High yield issuance in 2010 was driven by refinancing as companies took advantage of low rates to replace Existing bonds with cheaper debt.
According to a report from Standard and Poor's called Leverage Commentary and Data, Accounting accounted for 64% of U. S. High yield volume. Bank loan ratings primarily to extend maturities Also soared in the 4th quarter. With the popular Build America bond program expiring at the end of 2010, U.
S. Public finance dollar volume posted all time record dollar volume issuance for our 4th quarter. It also was a record year For the U. S. Public finance issuance, the $486,700,000,000 of dollar volume issuance in 2010 topped the previous In 2,007 by $18,300,000,000 The structured finance market is still struggling Both here in the United States and in Europe, all things considered, we like our prospects in 2011.
We expect It starts with refinancing. Refinancing requirements are substantial and will contribute to a healthy new issuance Between 20112014, S and P estimates there are 5 point $6,000,000,000,000 in bond and loan maturities coming due for the U. S. And European markets. Although Some of the 2011 maturities have already been refinanced.
S and P estimates maturities in the range of 1.2 1,000,000,000,000 to 1,500,000,000,000 per year between 2011 2014. Access to capital markets remain Strong and financing costs are still low. Tighter spreads will allow for needed refinancing requirements. Fundamentals are supportive. Credit investors expect default rates to remain low in 2% to 3% range and Product to grow between 2.5% and 3% in 2011.
Confidence of issuers and investors is improving. Companies are generating cash And S and P saw increased weighting of higher yielding and higher risk bonds in Some portfolios in North America deals were oversubscribed for companies rated B- and sometimes even lower. Merger and Some of the trends driving activity in the United States markets in 2011 will also contribute to We anticipated improved results in 2011 from most of our regions. We look for modest growth in the U. S.
Public finance Sector after record issuance in 2010, S and P expects the current economic and budget climate should result This year by state and local governments in the face of added pension costs and the toll of tax revenues. In the structured finance market, we expect Slow recovery in both the U. S. And in international markets. The outlook for the leveraged loan market Excellent as banks resume lending and investors' appetite for the paper is high.
Now let's shift for And let me spend a moment just reviewing a number of the issues that we're dealing with. And let me begin with In their entirety, 7 more lawsuits have been voluntarily withdrawn. 4 of the dismissed case involved Fraud charges. Clearly, we are making progress in the 3 broad categories that we use to keep investors up to date on the litigation situation involving Standard Poor's and the corporation. Let me go through them.
1st, in our first category are the underwriter claims based on the Securities Act of 1933. Here, the plaintiffs have alleged that Standard and Poor's is liable as an underwriter or seller of securities. To date, 12 of our motions to dismiss claims under the 'thirty three Act have been granted. 3 of these dismissed claims Have been appealed. On January 11, the U.
S. Court of Appeals for the 2nd Circuit heard arguments on the plaintiff's appeal of The earlier dismissals. In the second category, there are cases brought by purchasers of our They alleged that the company's statements about its earnings and ratings business were misleading and violated the Securities Exchange Act of 1934 as well as ERISA. In 3 of the 4 cases in this category, our motions to dismiss have been granted. The plaintiffs appealed 2 of those In the 3rd category, these are lawsuits asserting a variety of state law Claims including fraud.
Included here is the Rice litigation in which a federal court in California last October granted our motion to dismiss with prejudice He did not believe the ratings to be true when they issued. In addition to these three categories, there are some lawsuits overseas. They are in very Preliminary stages and some involve jurisdictional issues. The most notable of the at this time is the Parmalot litigation, which Got started in Italy in the fall of 2,005. In a procedural hearing on January 11, the judge ordered Final briefs to be submitted in March.
We continue to believe that the outcome of this litigation against 2 subseries of the McGraw Hill Companies should not have a material In recent weeks, we have seen favorable decisions by the state courts in Pennsylvania And California, a state court in Pennsylvania dismissed negligent claims and narrowly circumscribed a fraud claim In 4 related cases brought by the Federal Home Loan Bank of Pittsburgh. By narrowing the fraud claim, the state court established a very high standard for the plaintiffs. To prove that fraud occurred, the judge ruled that the plaintiffs must show that the credit rating agencies misrepresentation in connection with the ratings of 3 specific SIBs. In December, a California state court granted our motion That the complaint falls under a California statute protecting speech made in the public interest. The decision in California Shifts the burden in the case to CalPERS, which now must demonstrate with a probability of success that it can prove its claim.
It is difficult to estimate When to expect more court rulings? Obviously, the courts have the discretion on when they will act on the lawsuits before them. But we believe that have already been rendered by the courts constitute meaningful precedent, which should help guide rulings on pending cases. In important ways, These rulings recognize limitations facing plaintiffs who seek to assert legal claims against S We are also prepared to operate in the new regulatory environment. That's why Standard and Poor's has made significant investments in technology Quality, criteria, compliance and risk, and each of those 4 groups operate independently of the ratings business.
We To meet new regulatory requirements, there may be an estimated $12,000,000 to $15,000,000 incremental In the U. S, we expect the Securities and Exchange Commission to engage in more rulemaking In 2011, and that's obviously to meet the requirements of the Dodd Frank Act. We also expect there will also be some new regulations from Canada and Singapore, new regulations have already been passed in Hong Kong and Taiwan. In January, the European Securities and Market Authority or ESMA was launched to oversee rating agencies in the European Union and to exercise other oversight powers. ESMA is now staffing up and we welcome the move to a more centralized approach to regulation in the European A harmonization process is very much necessary and needed.
Even as the new regulations in Europe are coming on The European Commission last fall issued a paper soliciting comments on the rating agencies for potential new legislation. Much of this ground has been covered And that's reflected in comments that the commission is now receiving. For example, the British Bankers Association and the Association For Financial Markets In Europe, told the commission to proceed with caution in introducing still more mandatory requirements and to allow We are carefully tracking developments and reviewing the important issues with decision making. Any new law would require the approval The European Parliament and the European Union State, a time consuming process to say the least. We also believe our QCCR So let me sum up for Standard and Poor's in 2011.
The legal risk remains very low. We are prepared to deal effectively with the new regulatory Continuing strong corporate issuance should produce high single digit revenue growth. Operating profit should grow in the high For the full year 2010. The revenue pattern is also reflected in the latest market data. The elementary high school market Finished 2010 with an increase of 3.3% despite a double digit decline in the 4th quarter and these are all according to the Association But sales fell 3.3% in the 4th quarter as 2nd semester purchasing declined.
We are assessing that situation, But at the moment, we have more questions on that than answers. 4th quarter comparisons in 2010 for McGraw Hill Education were more difficult because of performance in the Q4 of 2009 and that was in both L HI and higher education market. As we had anticipated, a strong state New adoption market was key to our performance and to the El Hai market's growth in 2010. We captured about 30% of the state new adoption market, which is estimated at $850,000,000 to $875,000,000 in total and increased market The gain by the McGraw Hill School Education Group in the elementary high school market was offset Graham, and this is the leader now in formative assessment market, continue to add new clients in 2010. The McGraw Hill Higher education, professional and international group's revenue declined by 3.3% in the 4th quarter, but increased 3.8 percent for the year.
In the U. S. Higher education market where enrollments increased again in 2010, we saw growth In all four of our major imprints as well as double digit gains for our digital products and services. However, we did not match the industry's We will be the only publisher to have a homework management product, McGraw Hill Connect, and a custom publishing system, McGraw Hill Create, integrated For its large institutional imprint, Blackboard currently services approximately 80% of U. S.
Colleges In professional markets too, we saw double digit growth for digital products and services that Make up increasing share of our product mix. The great majority of our new print publications are also released as ebooks and as a result Of this policy, we ended 2010 with a list of more than 6,000 titles that can be purchased electronically. More than 100 30 mobile phone applications were also available for download by the end of the year, more to come. Along with eBooks, our online Digital developments will increase our opportunity in international markets. The latest example is the recent announcement capabilities to deliver supplemental educational services by cell phone to students and workers and those seeking to increase their job skills.
Incidentally, with 5,300,000,000 cell phones estimated in The world, there are 700,000,000 cell phones in India at this point. By the end of next year in India, 1 in 5, 20 10 of all cell phones will be there. By the way, just to take that a step further, China currently has about 800,000,000 cell phones And combined, India and China represent somewhere around 42%, 43% of all the In the elementary high school market for 2011, we expect flat to minimal growth, A reflection of the continuing pressures on state and local budget. Just as in 2010, the swing factor will be Strength of the state new adoption market by some estimates, the state new adoption market in 2011 could be the same As 2010 or it could be somewhat larger than it was in 2010. One of the key factors we're watching very is obviously the adoption market in Texas.
But the outlook for the state new adoption market in 2011 will depend to a great In Texas, has recommended full funding for all subject categories, but the actual amount will obviously depend on the budget still to be developed In 2011 revenue growth in the low single digits, operating profit, a decline is anticipated largely driven by Investments, especially for the digital development, the decrease could range from mid single digits to high single digits. And finally, Now let's review McGraw Hill Information and Media. Strong results all year in the global energy markets, growth in digital revenue and a substantial margin Expansion marked the performance of this segment in 2010. Revenue in the 4th quarter decreased by 1.6% and declined by 4.9% for the year, But excluding BusinessWeek revenue, 4th quarter revenue grew by 7.6% and by 6.2% for the full year. Operating profit, including a 4th quarter restructuring charge of $10,600,000 declined by 14.6 And grew by 98.6 percent on an adjusted basis.
In 2010, this segment produced the best operating margin In a decade. More importantly, we believe the new level is sustainable. In 2010, we reported an operating margin of 17.7 announced 18.8% versus 9% for 2000 and 9. The 2010 adjusted margin is the best information And media has achieved since 2000 when it hit 21.1%. Obviously, the divestiture of BusinessWeek in 2009 contributed to the Improvement, but so did the continuing strength of Platts and the rebound in the Broadcasting Group's performance.
Platts produced Strong results all year as market demand for its proprietary content grew in the United States as well as in international markets. More proprietary including 24 new price assessments launched in 2010 will keep Platts moving ahead in 2011. Many of the new price assessments are 1st in their markets, an indication of Platts' ability to recognize and respond to these trends. To add new In the energy markets, Platts also acquired Ventec Energy in January and announced the acquisition of OPUS, Oil Price Information Service, which is Subject to regulatory approval. Ventec is a leading provider of fundamental data and analysis for the natural Softness in the commercial construction industry still continues to hamper McGraw Hill Construction activity 2010, which we're starting to see to pick up.
All these brands are part of the business to business group whose revenues declined by 7 in 2010, but grew at 4.9% when you exclude BusinessWeek. The business to business grew as increasingly a Casting Group produced a 21.7 percent increase in the 4th quarter revenue to $28,400,000 and an 18.3% Game for $2010,000,000 to $96,000,000 Summing up for the Information and Media segment, the outlook for 2011 calls for revenue growth in the mid single digits, adjusted operating profit growth in the mid single digits as well. Okay, that wraps Our review of the operations, so let me sum up then for the outlook for the corporation in 2011. We are very encouraged by our Progress in 2010. It was the product of some important decisions and recovery market that will help set the stage for another year of growth in 2011.
We expect to build on our strong 2010 results and the solid finish at both Standard and Poor's and McGraw Hill Financial. We will also make important investments in digital products and services at McGraw Hill Education to take us Okay. With that, let me hold it there and let me turn it over to our CFO, Jack Callahan. Jack?
Thank you, Terry. And it's a pleasure to join you today in my first earnings release conference call representing This terrific team at the McGraw Hill Companies. Terry has reviewed the segment results and guidance, but I do want to provide additional detail On our 2 new reporting segments Standard and Poor's and McGraw Hill Financial. Then I will focus on Corporate and general expense, free cash flow and investment, share buybacks and our strong financial position. Let me start with some additional color As non transaction revenue for Standard and Poor's and as expense for McGraw Hill Financial.
The revenue and expense is then eliminated For total McGraw Hill Company results, the amount for 2010 was approximately $56,000,000 which we have broken out by quarter on Exhibit 7 of the press release. Also as Terry has indicated, S and P Ratings Direct and S and P Ratings Express are now part of McGraw Hill Financial. Previously, these products were reported as part of Credit Market Services non transaction revenue. As a Result of this as well as some other more minor movements, you will note that Standard and Poor's revenue is now less than the previous reported credit market services Revenue and it is modestly more transaction oriented. For example, in 2010, 61 percent of Standard and Poor's revenue is non Transaction related versus 65% for credit market services.
Now let me turn to some corporate items. Adjusted corporate expense, which excludes the one time charge A $15,600,000 related to subleasing excess space in the company's New York facilities increased by approximately $10,000,000 to 40 to $164,400,000 This year on year increase is largely due to increased incentive compensation as a result Strong 2010 results, especially coming off of depressed base in 2,009 and the impact of the increase in vacant space. Going forward, we expect this increase in corporate expense to moderate. Currently, we are Expecting an increase in the mid single digit range in 2011. One last point on a number of corporate items, both interest expense Now let's review free cash flow.
As a reminder, to calculate free cash flow, we start with Cash provided by operating activities and deduct capital investments and dividends. What is left Given those strong results, we made a discretionary payment of $125,000,000 to our We do expect another year of strong free cash flow in excess of 700 $1,000,000 in $20.10 in line with previous guidance of approximately $160,000,000 This level of investment as our lowest 33 states in the District of Columbia have signed on. Even though tests based on the common core state standards are not scheduled Until the 2014, 2015 academic year, many states want to begin transitioning their teachers and students to the new standards beginning next fall. By delaying some publication dates by several months, we could reflect both the existing state standards and the final versions of the Also stepping up digital investments as part of these programs. For 2011, we expect pre publication investment to return to a more normalized level.
We expect to spend roughly $200,000,000 to $225,000,000 or approximately a $50,000,000 to $75,000,000 $6,000,000 in 2010, it is expected to decline slightly in 2011 given the reduced level of investment we saw in 2010. Turning to capital expenditures. Capital expenditures were $115,000,000 in 20.10. For 2011, we Expect capital expenditures of approximately $150,000,000 driven in part by increased digital and technology related investments. We continue to return Cash to shareholders.
In 2010, we returned $548,000,000 through dividends and share repurchases. We did not repurchase any shares in the averaging $29.37 per share. That leaves 8,400,000 Shares in the 2007 program as authorized by the Board of Directors. We plan to continue to repurchase Remaining in 2011 subject to market conditions. This share repurchase has been factored into our EPS guidance, though the impact is expected to be minimal.
We also recently announced a 6.4 Average shares outstanding was 310,300,000 in the 4th quarter, a 4,200,000 decrease versus the prior year due primarily to the 2010 share repurchase program. Overall, we continue to be Investments at the end of the quarter totaled $1,548,000,000 while gross debt comprised of approximately 1,200,000,000 As Terry mentioned earlier, we have already closed the Bentec acquisition in 2011 and we hope to do the same with the OPUS oil price information Have certainly exceeded my admittedly high expectations coming into the organization. The product portfolio is Deep with the potential for future growth. The capabilities and values of the team here are truly impressive. And Bob Behash
Thank you. This question comes from Sloane Bolen from Goldman Sachs. You may ask your question.
Hi, good morning. First, Terry, I was wondering if maybe you could start off with speaking to margins within the Financial segment, I guess, basically the S and P One, margins look like they were a little bit weaker in the 4th quarter relative to the issuance activity. And then second to that, to what degree you think you guys have pricing power to maybe kind of offset that in 2011?
Yes, thanks, Thanks, Laurent. Yes, the again, what's influencing a little bit the margins at S There have been some of the investments that we've been making all along, especially in the QCCR framework in In terms of all the compliance and surveillance systems, you have for $2,090,000,000 in that Number. And then you'll probably see another $12,000,000 $15,000,000 incrementally for 20 But even still, on an adjusted basis, you were north of 44%, albeit it was The decline from 2,009, but it's large part because of those costs. As far as pricing goes, we definitely want to Sead inflation at this point. And if I summed it all up in terms of all the different asset For S and P, it would probably be about a 4% price increase for 2011 and we'll see as McGraw Hill Financial has a lot more pricing power as it packages more of its data and analytic products.
And you're going to see much more Expansion into the broader wealth management and business development areas there. We're very buoyed by the Capital IQ growth and the continued growth on that front of it. And I think that margin improvement will come as we are able to both price and to be able to extend into a more Scalable addressable market.
Okay. Just to add a bit on elaborate a bit on Terry's point on the cost side, particularly S and P, there was Some select hiring, particularly outside of the United States. And there was also a little bit of a step up in incentive compensation, good year. And also the Larry Some more longer term incentive related compensation. So that also were factors too in addition to the quality and control investments.
Okay, Good. That's helpful. And then Jack, just a question for you on the new reporting, which is helpful. I was wondering maybe if you could give Just sort of a breakout of those major segments, either by revenue or operating profit for Where the benchmarks fall within, because it helps on the subscription versus non subscription, I was wondering just by the different segments, if there's a way to break those out?
So are you asking within each segment in terms of subscription, non Description? I'm just
No, no, no, no. Just as a whole of those 4 major ones that you provided. And specifically, we're looking at the benchmarks is the one we're trying to split out a little bit.
You mean benchmarks that with the benchmark business within McGraw Hill Financial? Exactly. The level of disclosure that we've provided right now in terms of the international versus domestic and the subscription, non subscription, as far as we'd like to go Right now, particularly as Lou needs some time to really kind of sort out how the organization is going to operate for the long term. So, I think that's probably as far as we'd like to
go for today. Yes. And Sloane, the subscription side of McGraw Hill Financial is about 75% roughly of the revenue and the non Subscription is 25%. And for the most part, index services is highly Represented in the non subscription area.
Okay, fair enough. And then just one last question. I was wondering with regard to the investment on CapEx for For digital investment in the upcoming year, I was wondering maybe if you could elaborate a little bit on what types of investments those are going to be and will that The pace over the course of the year and maybe when we can expect some impact of that investment?
Well, the most of that Investment that we spoke to today relates to integrating more additional digital content into the some of the education Development and that will be paced in over the balance of a couple of years here as these new programs are developed. So while there'll be Expansion of some of our digital offering as Tara referred to as relates to our leverage Blackboard and our linking it up Connect, some of the big dollars that we're spending really relate more to some of the future programs that will be introduced in the coming Yes.
And increasingly, Sloan, putting education aside for a moment, all of these businesses are Putting out products and services that are digitally composed. And so the digital content, it's starting to get A little bit more difficult because most of it is all digital. On the education side, the market is now really pushing more aggressively for digital products in additional ways. And so you're going to see a continued ramp up on that. But I think one of the things that's also very important here is We don't want to go it alone.
You're going to see increasingly more and more partnerships like the Blackboard relationship. And I think that when you start creating learning platforms that are already embedded into those systems, the ability to build That is going to be very powerful, but we'll do what the market wants. And if it's hybrid print or digitally, we're going to go Direction.
Okay. Thank you, guys.
Thank you. This question comes from Peter Appert from Piper Jaffray. You may ask your question.
Thanks, Terry. So this is just, I guess, a longer term question. I'm looking at the financial results of The education business for McGraw Hill and frankly they haven't been very impressive over the last call it 4 or 5 years. And so I'm wondering Two things. 1, strategically, why does it make sense for you guys to be in this business?
Do you really need to keep putting all the resources into this for Pretty much no growth in low capital returns. And then related to that, with longer term vision, where do you think this business could be from a profitability standpoint in
Thanks, Peter. I think that there's been a lot of factors that's influenced educational publishers Last several years, not the least of which has been funding pressures with the economic downturn and the difficulties that Certain states are having. If you believe in the overall growth projects and the overall growth as a country, no country Can survive without the solidarity in the fundamental education system. I think we're going in the right direction. I think some of the Form initiatives building off of No Child Left Behind and getting into narrowing the skill gap that Increasingly growing in this country, gives us an opportunity skill gap everywhere.
And that one gives us an enormous opportunity. And I think that the digital Environment is going to allow us to really accelerate on some of that, which will improve growth rates and improve margins on that part. But you still have The tale of 2 cities, the higher education professional and international is growing nicely and The margin participation is strong and you're going to see more and more partnerships as we get after vocational, professional, managerial development and As well as getting thicker into the various disciplines of science, engineering, technology And so forth. On the K-twelve side, I think, again, with some help in terms of Federal guidance in terms of core common standards and things like that, we'll be able to significantly improve on that picture. So I think it's a I think it is a very exciting platform, and it's critical and vital to the success of our growth As a country, on that part, you get this wrong, how do you get how does the country So I think that increased emphasis on getting digital is going to be very important, but also Being able to help expand in terms of the specific educational services to reduce those Scale gap,
John. And is 15%, Terry, you think the right margin for that business longer term?
Clearly, as you become increasingly more facile in a digital environment, I I think you're going to accelerate your capabilities to target various audiences, and you're going to be able to accelerate top line and bottom line growth, and You should be able to do it more efficiently and therefore get margin improvement. So there is no let up to the margin improvement that we've talked about in the And that we expect going forward. Okay.
And then one other thing, Terry, the less active Sure. Repurchase expectations for 2011, should we read into that that perhaps you're going to be a little more active from an acquisition standpoint and Any particular focus you could point us to?
Yes. I mean, the cash that Jack talked It's pretty good. And so we've got very high levels there and very low debt. And we just want to, at this point, going into the year, make Growth projects, things like the Blackboard, things like the Wipro mobile learning platform, but Lots of examples of that way. So between dividends and share repurchase, we are very excited about the $6,400,000 increase in the dividend, and we just want to make sure Yes.
It's understood that we have a very strong pension for share repurchase And we're just going to go into the year a little bit more measured, but stay tuned. Everybody competes for the cash And we'll see what makes sense as we go.
And I think one of the goals here is to have a real ironclad balance It's one of the real strengths of the company. It provides us a lot of flexibility. And if you think about it, it was really in the Q4 where we've That was the back end of 2010, we really started to have a real step up in our acquisition activity. And so the significant activity in 2010, we have Now it's 2 acquisitions closed one and have another one pending for 2010, so for 2011. So we just believe that it's prudent to maintain our Flexibility for the long term.
Yes. And that's for now. We'll see where we go.
Is McGraw Hill Financial the priority from an acquisition standpoint then?
Well, I think you're going to see priorities across the board. You're going to see Significant geographic expansion on the Standard and Poor side. Remember, given the fact that banks are deleveraging And Saudi Arabia and the continuation of expansion in Malaysia and Indonesia and things like that. And that's where we're benefiting from so nicely in You're going to see more activity that way, and we're going to be opening In making it even more transparent and splitting it out, you're going to see a lot of activity on McGraw Hill Financial as we Some of the value that is there make it more transparent, but also The ability to horizontally integrate some of our capabilities, so you can focus more carefully, not only on large financial institutions In terms of product and services, but also in terms of wealth management, business development, all of those kind of things. So yes, we're very focused on So digitally, education is it's all things, and we're pushing very And Jack mentioned Platts and those acquisitions.
But J. D. Power, Also in we're expanding very aggressively in China, where car sales right now in China have surpassed Here on that one. So you're going to see a lot of scale, but geographic expansion and digital, the 2 Great.
Thank you.
Thanks, Peter.
Thank you. This question comes from Craig Huber from Axis 3/42. You may ask your question.
Yes, good morning. Thank you. My first question has to do with each of the last two quarters your financial services costs look like About 13% to 14% year over year. Can you please give us some more details on the cost growth here? Just break it out a little bit better.
Thanks.
Okay. Hi, Craig. Yes, I think that, again, as the year progressed, we were obviously, as Jack We're saying there was the talent ramp up, there's the incentive compensation, there's Increased costs on the QCCR framework, and there was also some product expansion on that as well. But you got to remember, As we came into, we had a very good 2,009 Q4 and in the Q1, it was It's red hot. Then the second quarter significantly slowed down.
And we were trying to gauge at Just where some of this was going. As you know, spreads were widening, and it wasn't until we got To June that we saw or seen the narrowing of spreads and then the rest of its history, corporates, munis, High yield CLOs, sovereigns, it just started to come very aggressively. And so with that increased revenue on There was also some ramp up on the expense side. So, I mean, it wasn't an even year. It was in anticipation of what the demand was.
One more minor addition to particularly in the Q4, if we're looking at the old segment Financial services, it was impacted by the addition of the markets.com too. But the other Drivers were more significant.
Yes. And then also, you mentioned earlier a Price increase in financial services or S and P, I guess, roughly 4% for the New Year. Were you talking just about the transaction side? Or is that also just about the
No, that's in large part due to the transaction side, Craig. Again, We take a look at the overall increase on cost for regulatory and The kinds of things that way. We take a look at what inflation factors are there. And so we want to be Ahead of inflation, and I would say in some areas, we're going to have a little bit more pricing power. But I think as A rule of thumb at this point looking at Standard and Poor's for 2011, an aggregate 4% increase would be a good If that changes, then we obviously won't be telling you.
But right now, I'd say an aggregate 4% is Good number.
I guess you're suggesting the non transaction piece, what roughly half that maybe?
Yes, about
Ballpark it? Okay. And then also can you I know you hit on this a little bit, but do you have much expectations for any significant European Regulation changes here as we head into 2011 or is it just too hard to tell?
Well, I mean, it's Certainly fluid, but I'm encouraged. One of the things that gosh, I mean, when You think about the regulatory setup and you go back to the end of 'seven and 'eight and 'nine, everything was coming In vertical steps, you had individual countries, you had different agencies like And CAESAR and the FSA in the UK and so forth, the European Commission. And so everybody had a different issue in all that. And One of the needs here was to get some level of harmonization so that there's some consistency to all of that. We are in a Much, much improved environment, both in Europe, here and increasingly in Asia where some regulation It has already preceded the financial crisis.
So we are in a much better Europe is in a much better place at this point and we're going to keep pushing for that. And I think As things continue to recover and some of the noise lowers, there is more drive On regulators' part, not to co it alone, but also to take into account a broader And harmonization. So I think that I think things are definitely improving on that front and we'll continue Just here in the United States, clearly, when we take a look at the Dodd Frank Bill, that is not in stone. The SEC is weighing in all of the time now in terms of Where to strengthen it, where to amend it, where to and so forth. And so I think that is going to be a process that's going to live with For a while, and I think that's good.
Just because we did pass something at one point in time doesn't mean that We need to live with it forever. There's always amendments going on, and I think we'll see a push for more harmonization.
And then lastly, Terry, on education, can you talk a little bit for 2011 for the open territories and residual sales in total? I think Combined roughly 3 times the size of the adoption market, but what's your expectation for the overall market?
Yes. Well, I wish
I could. Again, the state environment is a very fluid one. I feel more comfortable On the state adoption side, we think that the floor would be the same level 2010, now again, we have to watch a few people like California and Texas, In Texas in particular, but our thinking is it's going to be better on that one. The open territories It's still a very confusing one. As you know, we have gone through a Number of years now, where the growth has been very low or negative on that part.
There is such a Huge pent up demand on that one. And so at some point, it has to start to improve on that one. But Let's take a look at it as we get into the year and we get some hard data on some of the states. But right now, I don't have a lot Good guidance on the open territories.
Okay. Thank you, Terry.
Thanks, Craig.
Thank you. This question comes from William Byrd from Lazard. You may
Yes, Terry, I was wondering if you could just elaborate a little bit more on the new issue pipeline at S and P. And also Separately, just in higher education, you had some weakness in the quarter. I guess, what lends itself to the bounce Back, you expect an 11? Thanks.
Thanks, Bill. Well, the new issuance numbers that we put out and The market is putting out are pretty clear. I mean, we are seeing the continued pace From the 3rd, Q4 of last year into the Q1, corporates. And again, In large part because of refinancing activity and also because of banks deleveraging and not lending at the Same level. The bond market is the market of choice.
So corporates are We're seeing some activity in CLOs in the structured finance area. You're starting to See besides asset backed, you're starting to see a few issues on the commercial mortgage backed market. And I think that There's going to be a little bit more pent up demand that we're going to see using that market a little bit. Residential is going to take time And all that, so we don't see much on that side. So from a new issuance standpoint, it obviously looks quite good.
And by the way, again, as I was making the comments about local bond markets and the like, increasingly, those numbers Are going to be very, very helpful. The refinancing side is really a huge piece. With maturities between 2011 2014, we're looking at about $5,600,000,000,000 So refinancing activity through the end of 2014 and we think that will continue and the number that we were using just as a It's about $1,200,000,000 to $1,500,000,000,000 a year through 2014, but that's refinancing is going Yes, big piece.
And Bill, your other part of your question was on education and going back to the guidance that Terry laid out, I don't think we're Seeing a big bounce back here. I mean, we do think as Billy on Terry's comments, a challenging market to Understand we do have to make some investments. We are lapping 25% profit growth, which is a huge number here. So we are profits to be down year on year in the Education segment right now and we're pointing to sort of a mid single digit to It's a high single digit range of decline. So we do think this is going to be a challenge segment that we're going to have to navigate as we go through the And prepare for the future.
Yes, I was wondering I guess specifically about higher ed, which I thought Terry said We expect to be up kind of 4% to 6% in 2011%. It looked like the quarter was down about 3%. So I was kind of wondering Why it was down and why growth would bounce back so much?
Yes, well, it goes to the December. As we both know, from a market standpoint, after all of this wonderful growth and And really being pushed off of really high enrollment numbers. It sort of hit a wall. We're still trying Understand that. There have been some suggestions that the rental market influence that.
I don't think so. I don't think the rental market is going to be that material to have that kind of an effect, but we did see a It turned down in terms of ordering, and we're still working on that. But we and by the way, as Jack said, January It's a little soft too on this one. So we'll see it. We're working on that part of it.
But I think for the full year, In terms of the demand that we see, that will be back on track. But the December, not the Q4, really December was a market factor there that we all are trying to explain
And just stepping back to buybacks, what would move you beyond the measured taste on buybacks?
Well, I think we got to take a look, Bill, The environment overall and how things are progressing and best uses Jack said it well, we're very excited about share repurchase and we want to come into the year Given the competition for the cash that this is a really good position to start with. We'll see as we get And we still have if we complete the 4,200,000 shares Sooner in all of that, and we think that that's extremely helpful To the overall picture, could we go into the remaining $4,200,000 yes, sure I think coming into the year, we have high expectations for 2011, and we want to build off of 2010. This is a good posture for us to take at this point and we'll see.
Thank you. Thanks, Bill.
Thank you. This question comes from Michael Mills from JPMorgan. You may ask your question.
Great. Thank you. Two questions Following up on Peter and Bill's question is can you just tell us the cash balance is How much of that is trapped outside the U. S? Is that perhaps an issue that mitigates repurchase somewhat?
And then I have a follow-up.
We don't Let's just put it this way, Michael, it's a consideration, particularly kind of given the step up in acquisition activity that we've had in 4th quarter and pending in 2011, but I wouldn't call it a huge constraint, but it is a consideration that is leading us back to make Sure, we have adequate flexibility, particularly as we're starting to see some ideas in the acquisition pipeline. We're starting to do deals now, but we want Sure we have those chances down the line.
Okay.
And then the other thing, just the commentary on margins, if you didn't say But if I back into the you're saying S and P ratings revenues up high single digits. I think the I said profits up low double digits. So you're actually pointing to margin expansion in 'eleven, which is I'm happy to see. And I'm Just wondering, can you just confirm that's what you're guiding to? And then second?
Let me just look at the slide. I think the guidance we gave was high single Just for both top line and bottom line. So from the guidance, it's roughly flat margins. But obviously, we're We're going to work to try to do the best we can there. But again, there's some it's back to the quality investments and the international Growth investments that we're going to have to pace as we start to build out the global footprint.
Okay. Maybe I misread it then. The more important question on the attributable margins that you're pointing to at financials, I guess you're calling it McGraw A wide mix of profitability within those properties. I mean, is that a business that can get to the mid-30s
in a reasonable amount of time?
How do you think about that?
Well, let me put it
As I was mentioning, those businesses for the most part will all even though they are similar businesses in terms of data Analytical business and so forth serving similar in addressable markets. They were all Managed vertically and all that. We are have begun, as I already said, in In terms of creating a horizontal integration to all this, we are already starting to take out costs and you're going to see a lot more costs come out on But this is also a high growth platform and it's going to get an awful lot of attention. And We're very, very excited about the leadership team there. And so, no, this is I think when you start talking About a $1,200,000,000 plus segment with a 26.5 Okay.
Thank you for your time.
Thanks.
Thank you. We will now take our final question from Doug
It seems I mean, you cite some very large numbers, but it seems like Europe has not really unlocked yet, given the Turmoil and spreads over there. Is that something you're building into your expectations for 2011 or could that be an 2012 and later event?
I think it's both, but definitely we have expectations, Doug, for some of the refinancing activity coming out of Europe. And They're a part of those maturities that are very evident. But no, I think as we were talking about With ESMA and the oversight direction that they're taking to eliminate some of the noise and to get a little bit more harmonization. And I think that kind of activity is going to pick up.
And then just a follow-up on the muni side. I mean, I'm surprised at your enthusiasm in the muni outlook given all the withdrawals we're seeing in the muni funds And the big widening of spreads there, is your view that states have no choice but to come to market? Well,
Again, I think that is a correct assumption. And again, I think that We've taken a look at investment grade and speculative grade. We're seeing activity straight across the board. And we haven't seen People keep talking about defaults and all of those kind of things. We look at all sorts of studies over the last 25 years In terms of different kinds of economic scenarios, albeit this is more challenging one.
We Some 17,500 issuers in here and the default rate looking back is about 2 point Defaults per year. Now in unrated municipal debt, it's a different situation. But in terms of that Activity, the default rates are extremely low, but the demand is going to be high And it's not just going to come from cutting spending, albeit that's an important function to the whole thing. And so it's not that I mean, I wouldn't put in Same category as corporates are high yield, but you're going to see growth there and we