S&P Global Inc.
Q1 2011 Earnings Call Transcript

Published: 26 Apr 2011

[Operator:]

Good morning, and welcome to The McGraw-Hill Companies' First Quarter 2011 Earnings Call. I'd like to inform you that the call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mcgraw-hill.com and click on the link for the earnings announcements conference call. At the bottom of the webcast page are 2 links. If you are listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select the windows media link. [Operator Instructions] I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations of The McGraw-Hill Companies. Sir, you may begin.

[Donald Rubin:]

Thank you, and good day to our worldwide audience. We thank everyone for joining us today for McGraw-Hill's First Quarter 2011 Earnings Call. I'm Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies. With me today are Harold McGraw III, Chairman, President and CEO; and Jack Callahan, Executive Vice President and Chief Financial Officer. This morning, the company issued a news release with first quarter earnings results. We trust you all had a copy and a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mcgraw-hill.com. Once again, that is www.mcgraw-hill.com. In today's earnings release and during the conference call, we are providing adjusted revenue, free cash flow and net cash information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management's. The earnings release contains exhibits that reconcile the differences between the non-GAAP measures and comparable financial measures calculated in accordance with U.S. GAAP. Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission. We are aware that we do have some media representatives with us today on the call. However, this call is for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at area code [phone] subsequent to this call. Today's update will last approximately an hour. After our presentations, the meeting will be open to questions and answers. It's now my pleasure to introduce the Chairman, President and CEO of The McGraw-Hill Companies, Harold McGraw.

[Harold McGraw:]

Okay. Thank you, Don. And good morning, everybody, and welcome to our conference call. As Don said, with me today is Jack Callahan, our Chief Financial Officer. We're going to review the first quarter results and the outlook for The McGraw-Hill Companies for the rest of 2011. Following our presentations, obviously, Jack will discuss the key financials, and then we'll go to any questions or comments that anyone has. As we reported earlier this morning in our news release on the first quarter results, a promising year is off to a good start. Earnings per share grew by 18.2% to $0.39 a share. Revenue grew by 7.7% to $1.3 billion. Our new segment, McGraw-Hill Financial, is unlocking new value. So let's start today's call by reviewing the performance and the prospect and begin with McGraw-Hill Financial. McGraw-Hill Financial is off to a strong start, adding subscribers, 74% of the revenue comes from subscriptions, and growing in both international and domestic markets. In the first quarter, revenue with the addition of TheMarkets.com increased by 16.2% and 11.9% without the acquisition. Operating profit grew by 35.3%. The operating margin expanded to 29.7%. McGraw-Hill Financial is focused on integrating and involving its capabilities into 1 scaled operation, offering global financial professionals our high-value content across all asset classes. We continue to make progress in leveraging our intellectual property across the new organization, while growing individual businesses. This activity involves developing innovative and integrated solutions for clients to manage investment and trading strategies. Case in point, a new leveraged loan index for our benchmark group that was created in collaboration between 2 McGraw-Hill Financial businesses, S&P Indices and S&P Leveraged Commentary & Data, designed to expand S&P's family of fixed income indices, the index became the basis of the first bank loan exchange-traded fund to hit the market. Assets under management in the new Invesco PowerShares leveraged loan ETF hit $70 million in the first month. This is just 1 of 32 new exchange-traded funds based on S&P Indices that were introduced in the first quarter of 2011. 18 of the new ETFs by the way were launched outside the United States. We now have 333 exchange-traded funds linked to S&P Indices with $323 billion in assets under management, and by the way, that's a 27% year-over-year increase. As this table illustrates, we maintain an active ETF pipeline to drive revenue growth. Besides driving revenue growth, these new ETFs have also diversified our product offering. In 2006, 62% of assets under management in exchange-traded funds were tied to our largest ETF, and of course, that's the SPDR S&P 500. At the end of 2010, the percentage has dropped to 43%, reflecting the diversification of our ETF revenue across different asset classes and different geographies. Expect more collaboration and diversification. In the Integrated Desktop Solutions group, subscriber demand for Capital IQ data, ratings content from the Global Credit Portal and the addition of TheMarkets.com got the year off to a very strong start. The integration of TheMarkets.com is proceeding smoothly. You can now access TheMarkets.com product via the Capital IQ platform. In the first quarter, Capital IQ grew its client base to more than 3,600, and that's a 23% year-over-year increase. The Enterprise Solutions group was formed to integrate multiple cross-asset data sets and to streamline the delivery of McGraw-Hill Financial, S&P and third-party data into 1 platform. That means, for example, introducing new integrated technologies, such as application program interfaces, or API, to enable clients to more easily incorporate data directly into their systems and into their workflows. Easier access to more information is obviously good for business and allows for greater insight and transparency into the markets our customers serve. We continue to see demand for our data in both pre- and post-trade markets. For example, Global Data Solution continues to grow the number of clients who are buying multiple services instead of just one-off data sets, especially in global markets. We are also pleased to report that in The Wall Street Journal's new annual survey of "The Best Analysts on the Street," Standard & Poor's equity research leads the list of 86 firms with 10 winning analysts. The Best on the Street survey identifies the top 5 analysts in 44 sectors based only on stock-picking skills. To be eligible, analysts generally had to follow at least 5 stocks in an industry group during the year. Nearly 7,000 analysts and more than 500 firms were surveyed. The Wall Street Journal online announced the winners last week. The newspaper will publish the formal list on May 10. S&P's Equity Research is an important resource for MarketScope Advisor, which is an online service for more than 80,000 financial advisors. Going forward, S&P Equity Research will be available on Enterprise Solutions and through our Integrated Desktop Solutions group. Clearly, McGraw-Hill Financial is off to a very good start and is finding new ways to unlock value. Let's sum up then for McGraw-Hill Financial. We expect double-digit revenue and operating profit growth this year, a combination of strong organic growth and the acquisitions of Markets.com [TheMarkets.com]. Okay, let's move over to Standard & Poor's. Powerful trends and record issuance in global bond markets were evident in Standard & Poor's first quarter top line performance. Revenue grew by 10.4%, but operating profits increased by 0.8%, primarily because of timing issues, difficult expense comparisons and a decline in Structured Finance. The operating margin was 43%. With year-over-year cost comparisons easing in subsequent quarters and favorable market trends expected to continue, we now anticipate that Standard & Poor's operating profit will accelerate for the balance of the year. That implies about 10% growth over the balance of the year to meet our current forecast of high single-digit operating profit growth for the full year. Let's start by reviewing the difference between the top and bottom line growth in the first quarter. First, foreign exchange negatively impacted profits in Q1. While foreign exchange rates increased S&P revenue by $1.9 million, it reduced operating profit by $6.1 million. Excluding foreign exchange, revenue grew by 9.9%, and operating profit increased by 4.1%. Second, the first quarter represented S&P's most difficult expense comparison. Q1 2010 margins were 47%, the highest of the year, versus a full year 2010 adjusted margin of 44.5%. That record was achieved despite the fact that Q1 2010 was S&P's lowest revenue quarter of the year and lower than the first quarter of 2011 by $42 million. Third, expense comparisons will become easier as the year progresses. S&P has made significant investment in technology platforms and staff to deal with the new regulations of credit rating agencies. That's the QCCR program that you've heard us talk about, and again, QCCR stands for quality, criteria, compliance and risk, which are managed independently of the ratings business. In 2010, we incurred incremental QCCR costs of $17 million, with efforts focusing on the implementation of the European Union and Japanese requirements, which were effective towards the end of the year. As a result, this increase was almost entirely realized in the second half of 2010, making first-half comparisons particularly challenging. For 2011, we anticipate an incremental increase of $12 million to $15 million and expect the increase to be more evenly spread. In subsequent years, we expect QCCR costs to increase at a lower rate, level off and possibly decline as new regulatory requirements subside. Staffing increase, mostly at CRISIL in India, include the acquisition of Pipal Research late in 2010. The factors that helped produce a strong close in the fourth order last year underpinned our solid top line growth in the first quarter of 2011 and our prospects for the remainder of this year. Transaction revenue at Standard & Poor's grew by 17.2% in the first quarter as worldwide high-yield corporate bond issuance of $124.4 billion eclipse the previous record of $121.1 billion set in the fourth quarter of 2010. A key contributor to this performance was European high-yield issuance, which grew by 95% to $36.3 billion in the first quarter, and that's a new record too. A solid increase in investment-grade bonds and robust growth in bank loan ratings also contributed to our growth. As this table shows, refinancing was key to the high-yield volume. According to the S&P Leveraged Commentary & Data group, 64% of the proceeds were used for refinancings in the first quarter, coincidentally, refinancing activity represented also 64% of the high-yield bond volume last year. The rapidly growing leveraged loan market remains centered around what S&P calls the 3 Rs of leveraged lending

[Jack Callahan:]

Thank you, Terry, and good morning to everyone on the call this morning. It is a pleasure to review with you a strong start to 2011. Today, I will focus on a robust cash outlook and strong financial position, capital allocation and a couple of corporate items. We continue to expect another year of strong cash flow. Before dividends, we expect to generate cash flow greater than $1 billion. After dividends, free cash flow is projected to be in excess of $700 million. We expect to generate this strong free cash flow despite increased capital investments. For 2011, we continue to expect prepublication investment of roughly $200 million to $225 million or approximately a $50 million to $75 million increase versus 2010, which was an unusually low year. Capital expenditures are projected to be up to $150 million, driven in part by increased digital and technology investments. This compares to $115 million in 2010. We are extremely well capitalized with net cash and short-term investments at quarter end of approximately $100 million. Cash and short-term investments at the end of the quarter totaled $1.3 billion, while gross debt was comprised of approximately $1.2 billion in long-term unsecured senior notes. No commercial paper is outstanding. Turning to capital allocation. We spent $250 million in total on acquisitions and share repurchases in the first quarter, which were the primary drivers of a $250 million decline in cash and short-term investments from year end. We spent $126 million on acquisitions, the most notable being the BENTEK Energy acquisition, which, as Terry discussed, is now part of Platts in the Information & Media segment. In Q1, recent acquisitions accelerated revenue growth by approximately 150 basis points, while the profit impact was modestly dilutive. We also actively repurchased shares in the quarter. We repurchased 3.3 million shares for approximately $124 million, averaging $37.44 per share. A step-up in share repurchases this year versus our initial guidance is under consideration given our cash position and a reduced cash commitment for acquisitions now that the previously announced OPIS transaction has been withdrawn. As a reminder, there are 5.1 million shares remaining in the current 2007 program. To further increase buybacks, a new program would need consideration and formal authorization by the Board of Directors. Going forward, our robust free cash flow and strong balance sheet enables us to selectively add attractive, strategically relevant businesses, like BENTEK, to the McGraw-Hill portfolio while continuing to return cash to shareholders via share repurchases subject to market conditions. Now finally, let me address some corporate items. Corporate expense was $34 million in the quarter and decreased by 4% or $1.5 million from the prior year. 2011 expense benefited from a decline in real estate costs, as well as tight cost control. For the full year, we expect corporate expense to increase in the mid-single digit range versus 2010 adjusted corporate expense of $164 million. The 2010 expense excludes the one-time charge of $15.6 million related to subleasing excess space in the company's New York facilities. Net interest expense was $19 million in the first quarter, a modest decline of $3 million versus prior year. We still expect full year interest to be largely comparable to 2010, which was $82 million. Our effective tax rate was 36.4% in the first quarter, flat versus last year. Net income attributable to non-controlling interests was $4.2 million, largely driven by CRISIL. Our diluted weighted average shares outstanding for the quarter was 309.6 million, a 6.7 million decrease from the prior year and a 0.7 million decrease from the fourth quarter of 2010. The decline is due primarily to share repurchases, which more than offset equity-related awards. In closing, I appreciate all the hard work from our associates across The McGraw-Hill Companies to deliver a solid start to 2011, and we appear to be on track for a good year. Now let me turn the call back over to Don Rubin for the Q&A session. Don?

[Donald Rubin:]

Thank you, Jack. Just a couple of instructions for our phone participants. [Operator Instructions] We are now ready for the first question.

[Operator:]

Our first question today is from William Bird with Lazard.

[William Bird:]

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

[Harold McGraw:]

Yes, thanks. The S&P pipeline continues to be strong. Now obviously, the Structured Finance side is soft, and especially here in the United States, although we're seeing some activity in asset-backed deals, and we expect a pickup in the commercial mortgage-backed market. But the residential mortgage-backed market, obviously, remains very low. Where we are starting to see some structured activity is in Europe, and that's starting to pick up. But again, the corporate market, sovereign market, the muni market is off and as conditions exist state-by-state and city. But also, Bill, we're seeing a lot in the high-yield market and a little bit in the CLO market and so from a pipeline standpoint, it's quite good. So we were pleased with a 10.4% revenue increase, and we expect that to continue into the rest of the year on that part. As far as higher ed goes, Bill, again, the move on the digital side is really helping us on that, not only in the professional side but, more importantly, with McGraw-Hill Connect and those capabilities, and we're going to continue to push very aggressively on that. And again, we will continue -- it's a little early, the 4% to 6%, I think, is conservative. And on that 1, we'll see where we go with that and probably have a little better indication as we get closer to June on that part. But it's solid on that part, and we expect it to be a good generator for us for the full year.

[Jack Callahan:]

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

[William Bird:]

Great. Thank you very much.

[Operator:]

This question comes from Peter Appert from Piper Jaffray.

[Peter Appert:]

Thank you. Terry, the strength in the McGraw-Hill Financial business is particularly impressive, so just a couple of questions on that. First, the margin of 29.7% you did in the first quarter, do you think that's a reasonable run rate for the year? Secondly, as we think about the 4 segments, maybe you'd mentioned this and I didn't get it, but was there 1 particular product line or segment that drove the year-to-year strength that we saw in the first quarter?

[Harold McGraw:]

Yes, and again, thanks, Peter, because we're very pleased with the start with McGraw-Hill Financial. Now we've known this for a little bit, and unlocking value is, I think, is the right phrase here. We've seen good client attraction at Capital IQ. The efforts to integrate all of these businesses in terms of a horizontal platform is going very well. And so the Integrated Desktop Solutions business has been a source of strength for us. But it's really being able to combine a lot of different data and to embed it into customer workflows that we're getting that kind of benefit. Obviously, on the index side, continued growth there. I mean, we're up to 333 exchange-traded funds based on S&P Indices, and 1 of the nice things is, is that we were talking about the diversification and the geographic distribution is broadening in all of that. And so we're very pleased with that, and I think that given some of the shifts that you're seeing in terms of the consolidation move, in terms of exchanges and the like, where exchanges are trying to differentiate themselves through product differentiation, plays to our strength in all that, and so we're benefiting from that. But yes, we're very pleased with the strong start, and as far as the margin is concerned, again, because of the royalty rate, it was probably a little artificial at the end of the fourth quarter in terms of where the margin was. We like where the margin is now on this 1, and we think that we can do better now on that one, and we'll see as the year progresses.

[Peter Appert:]

Terry, can I just sneak in 1 other question, the -- unrelated to that, on the Education market, the pace of M&A activities has definitely picked up recently. Does McGraw-Hill need to be -- to make acquisitions or step up spending to stay truly competitive in terms of these digital initiatives?

[Harold McGraw:]

Well, you've got to differentiate between acquisition and organic growth. Things like McGraw-Hill Connect and Create, we’ve put an awful lot of effort into that digital transformation, and we're benefiting from that. When you start talking about different ways of being able to present content in various platforms, the arrangement that we entered into with Blackboard has helped us a lot that way. We've put a lot of effort into the testing side, and rather than acquiring capabilities, we built the Acuity platform that we're benefiting from now on the formative side. So, I mean, it's always a balance on that one. If there's a capability that is going to help you accelerate into a particular opportunity, okay. But it's a balance between being able to develop that capability or whether you acquire that capability. But again, in terms of the positioning that we've take [ph], it's been a combination of both, and we'll continue to watch that balance.

[Jack Callahan:]

Yes, and we're continuing to look very closely at those opportunities. I think the 2 things I would just add on Terry's comments is we just want to be sure that any of these acquisitions are not -- that they really help us accelerate our core strategy and moving forward and they're not distractions. And secondly, we want to be very disciplined when it comes to valuation. Some of these properties are quite rich.

[Peter Appert:]

Great. Thank you.

[Operator:]

This question is from Sloan Bohlen from Goldman Sachs.

[Sloan Bohlen:]

Just a follow on from Peter's question, just a little bit of trying to dig into what the costs on that digital expenditure is. 1, if you could provide a little bit of granularity, you talked a little bit about digital hosting being 1 area that, maybe if you could kind of break out the buckets of where the spending is? And then second, if you could think about maybe just the longer term, what you guys are looking for in terms of return on invested capital?

[Harold McGraw:]

Okay. You want to go ahead?

[Jack Callahan:]

Could you repeat the first part of the question again so I'll be sure that I'm in the right place?

[Sloan Bohlen:]

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

[Jack Callahan:]

Well, I can -- at least, I can in the context of like, say, the Education segment, where obviously we have a great deal of work to extend out that digital portfolio. A good part of, as you said, the year-on-year decline or the increased loss this year versus the quarter of last year were largely related to digital investments, largely in support of our higher ed and, to some degree, our professional business. And there's also -- I would also add there's also maybe some -- there's also some investment from a hosting point of view as relates to our online testing capability that we have too with Education. So those are the primary drivers within -- in the first quarter. But going forward, we anticipate that we'll extend more broadly into the K-12 space as we start to move forward on the development of future programs.

[Harold McGraw:]

Yes, and I think also, Sloan, that again, we're all watching the market activity very carefully. In many cases, digital or hybrid product is going to be critical in terms of being able to be successful in some of the adoptions. We are obviously watching Texas very carefully and also North Carolina, as I mentioned, in all of that, and it's a little bit too early to tell here. But again, from the transformation aspect of costs associated with digital, you've got to be there on that 1 to be competitive in those kind of adoption markets.

[Sloan Bohlen:]

Okay. A follow up with that 1 and just 1 more if I could, just Terry, you talked a little bit about the drivers of the non-transactional revenues at S&P. Could you maybe just elaborate a little bit on what is driving that bigger pool?

[Harold McGraw:]

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

[Sloan Bohlen:]

Okay. All right. Thank you, guys.

[Operator:]

This question comes from Michael Meltz with JPMorgan.

[Michael Meltz:]

Thank you, 2 clarifications then an actual question for you. You reiterated the EPS guidance for the year, and it sounds like, through the presentation, you're basically reiterating everything you said back in February in terms of revenues and EBIT projections for the segments. Can you just -- or is that true?

[Harold McGraw:]

Yes, Michael, I think that -- I mean, this is the first quarter, it's the smallest quarter of the year. We're off to a really good start, and we're pleased with that, but it's 1 quarter and the start of the year. I think the message really is, is that things are really in shape for a good year here. How good? We'll see as we get a little bit more market evidence, I think, but it's shaping up very nicely. So at this point, and in terms of earnings guidance and the like, it's too early to make any changes that way. So the $2.79, $2.89 is, as you say, a repeat from February. But we'll see. Let's see, let's see where the strength in some of the issuance, let's see the continued strength, the McGraw-Hill Financial across-the-board, let's see how Platts and J.D. Power continue, and then I think by the time we get together in a couple of months, we'll have a better picture of the full year, and then we can talk about fine tuning. But right now, it's just 1 quarter, start of the year. What's pleasing is that it's a good start and that everything is sort of falling in shape the way we were hoping it would, and we'll just see how strong it gets.

[Michael Meltz:]

And then Peter's question on M&A, the educational M&A, it sounds like from your response, and I don't want to put words in your mouth, but you, Terry, you said 3x capabilities, Jack said discipline and you don't want distractions. Is the inference that we should take that you are more focused on tuck-unders than larger transformational acquisitions?

[Harold McGraw:]

Well, I mean, again, I mean in terms of the opportunity, the market opportunity aspect of this thing, the digital transformation is critical. This is moving at a pace that is very rapid, and if you don't have the internal capabilities, I mean, you just can't go shopping and buy a little of this, a little of that and overpay and go through all the integration capabilities and the like. You have to have the internal capabilities to do that. And so what we have done is, both in terms of staffing and in terms of platform capability, we have really put a lot of effort into building that core competency. And again, that's why we have been able to develop McGraw-Hill Connect, which is far and away a superior online product and being able to scale it now even more is going to be very important. McGraw-Hill Create is going to be important there. What we did in terms of getting after administrative platforms is we entered into an exclusive arrangement with Blackboard to be able to accelerate that. And again, as I was mentioning to Peter, the Acuity platform, that was homegrown. That was home built, and we're very pleased with obviously the formative testing market and where that takes us. So it's always a balance on that 1. So yes, we're looking for components and capabilities, but whatever it is that you do on that 1, you have to have internally the core competencies to be able to grow it. And so that's the focus that we have taken and how you get there really is a balance.

[Michael Meltz:]

Okay. And then my actual question on -- just to drill down a little bit further, I know you went over this in the slides, the S&P ratings expenses or margin in the first quarter. Can you just maybe explain again, I guess, the EBIT growth was fairly or very light in Q1. The margin was disappointing in Q1. And just you mentioned compliance costs will decline in the second half year-over-year. I assume the international expansion costs are still in there, the higher markets acquisition costs are -- I'm sorry, the Pipal is still in there. What else will be different? If revenue growth is similar the next few quarters, what else will be different in expenses?

[Harold McGraw:]

Yes, I mean, again, these are all timing issues and factors on this. There's a couple of factors, and we were breaking them down for you. The QCCR and the data infrastructure aspect has been a big part. Just making sure that our systems are as bulletproof as possible, and so we focused a lot on that part, and so that's a portion of it. We've got investments in analytical resources, and this is U.S., outside the United States, India as well. You got the foreign exchange aspect, both the constant currency and the transaction side, and we also had some one-time items from India. You've got the real estate gains on 1 standpoint, and you've got the Pipal acquisition on the other and so we've broken it down. What you're looking at in terms of revenue, you had an increase of revenue and again, in a smaller quarter, $42 million in revenue, and that got us the 10.4% revenue gain. But in expenses, we had a $40 million increase as well, and it's those factors, the categories, that did that. We don't see that going forward. We feel very good about the full year profit picture, and you will start to see in the second, third and fourth quarter the profit margin there. And again, we're talking about for the balance of the year, about 10%, and that would get you to your low single digit. Now if we start to see a pickup in some of the issuance again, especially into the bank loan market in terms of some of the high yield, in terms of some of the corporates, that will obviously benefit, but we should wait a little bit and see some of that results before we start projecting that. But yes, these are just more one-time hits into the first quarter, and we feel very good about the full year. Jack, you want to add anything to that?

[Jack Callahan:]

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

[Michael Meltz:]

Okay. Thank you for your time.

[Operator:]

This question comes from Craig Huber from Access 342.

[Craig Huber -:]

I had a similar question on these costs for S&P, maybe I'll just ask a little bit differently here. This $40 million increase in S&P costs year-over-year, how much of that should we think of is not going to repeat by the time we get to the second half of the year? Could you break that out?

[Harold McGraw:]

Well, let me let Jack go through more specifically some of the numbers on this. But again, the 2 big pieces here really are the foreign exchange and also the QCCR. 1 of the things that we're going to see, Craig, is that, as you know, I mean over the last 3 years, the investment that we have made in the overall QCCR has been significant. We knew that this was going to peak about now, and that's why we came up with the forecast that in QCCR, we saw a $10 million to $15 million incremental increase this year. We're taking a lot of that in the first quarter on that one. So the reason that we're very optimistic about the rest of the year is that those costs now significantly subside and are behind us, and we'll benefit from that. And again, outside of the India situation, the acquisition there, it's additional investments. But Jack, do you want to give any more color on that?

[Jack Callahan:]

Well, I think about 2/3 of this increase, I would view it as it’s sort of being worked into the run rate, that these costs start to be worked into the run rate back in the third quarter of last year. So I think we lap that as we get into the back half. And then in Q1 itself, between currency and some other things, there's probably $10 million, $12 million of sort of one-time impacts that are now behind us.

[Craig Huber -:]

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

[Harold McGraw:]

Well, let's see. Again, the markets are still dominated obviously by more of the developed countries. What we're seeing, as you know, is the development of local bond markets literally around the world as there's less reliance on banks. So what we're seeing is increased activity in those countries that have higher consumption to GDP ratios and that are showing nice growth. So obviously, outside of the large developing countries, India, Brazil and China, you're seeing activity in Malaysia, you're seeing Korea, you're seeing Indonesia and a little bit in Thailand. And so we have invested significantly in terms of developing local relations in all of those markets. But we continue to -- we will continue to see much more participation coming out of the Asian markets and especially out of the ASEAN groups in the years ahead. But it's still a smaller portion, and therefore, the growth rates are high because it's coming off of low bases. But those markets are going to be quite strong.

[Craig Huber -:]

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

[Harold McGraw:]

Yes, I mean, what we're looking at, Craig, is obviously that there is more structured activity that we're seeing coming out of Europe than here. The asset-backed market never went away, and I think that there was -- given fear and uncertainty, I mean, I think there was less issuance, but it never went away and so that is pretty strong. What we're looking for domestically is probably a pick-up in the commercial mortgage-backed market. I think it's going to be a while for the residential part of the market. But again, in terms of some of the collateralized loan obligations and things like that, I think it's an improving picture. And I can't say that we will return to pre-crisis conditions, but I think over the next 2, 3 years, whatever, you're going to see just a steady momentous pick-up in structured activity on that 1, and I just think there's going to be obviously a lot less risk associated with it and, therefore, less yield orientation. But it's an improving situation but slow.

[Craig Huber -:]

Great. Thank you.

[Operator:]

We will now take our final question from Doug Arthur from Evercore.

[Douglas Arthur:]

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

[Harold McGraw:]

I think it's going to be more of the same. I think that obviously, we, like you, are watching very carefully how the federal government is implementing some of the race-to-the-top funds and the like, and there should be federal improvement that way as more states are pushing for Common Core Standards and the like. But I mean, it's obviously a question mark. If you take people by their direct comments and words, the federal portion is going to be higher this year, but we've got to see it. And in some cases, you're seeing more implementation on the race to the top, and some people are still pending on that part. Places like Texas, for example, they're going to be fine on their own. We just have to make sure that they're going to do what they say they're going to do on that 1. But I think the federal portion in 2011 should go up based on the comments and statements that have been made, but we've got to see it.

[Douglas Arthur:]

Great. Thanks.

[Harold McGraw:]

Thanks, Doug.

[Operator:]

Thank you. And that concludes this morning's call. A PDF version of the presenter slides is available now for downloading from www.mcgraw-hill.com. A replay of this call will be available in about 2 hours. Please note that the replay of this call, including question-and-answer, will be maintained on The 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.