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Executives

Robert S. Merritt - Vice President of Investor Relations

Harold Whittlesey McGraw - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John F. Callahan - Chief Financial Officer and Executive Vice President

Kenneth M. Vittor - Executive Vice President and General Counsel

Analysts

Manav Patnaik - Barclays Capital, Research Division

Craig Huber

William G. Bird - Lazard Capital Markets LLC, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

David Reynolds - Jefferies & Company, Inc., Research Division

The McGraw-Hill Companies (MHP) Q1 2013 Earnings Call April 30, 2013 8:30 AM ET

Operator

Good morning, and welcome to The McGraw-Hill Companies' Conference Call. I'd like to inform you this 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 first quarter earnings webcast. [Operator Instructions]. I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Robert S. Merritt

Thank you, and thank you for joining us for our first quarter 2013 earnings call. We apologize for any technical difficulties you may have had this morning. If you're still not seeing the slides, please refresh your screen. I'm told that, that will get you through.

Presenting on this morning's call are Harold McGraw III, Chairman, President and CEO; and Jack Callahan, Chief Financial Officer. Also joining us is Ken Vittor, our General Counsel.

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.mcgraw-hill.com.

In today's earnings release and during the conference call, we're 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 also reflect the classification of McGraw-Hill Education as a discontinued operation.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at (212) 512-3151 subsequent to this call.

Now I would like to turn the call over to Harold McGraw III. Terry?

Harold Whittlesey McGraw

Okay. Thank you, Chip, and good morning, everyone. And obviously, thanks for being with us, and welcome to today's conference call. Today, we report the first quarter earnings of our first year as a new company, McGraw-Hill Financial. By the way, approval of our new name is anticipated at the Annual Meeting of Shareholders tomorrow. The new name characterizes our unique set of businesses. McGraw-Hill Financial is a company that, since its founding in 1888, has continuously responded with innovative new products to satisfy the evolving needs of the marketplace.

Along with our new name, we will be introducing a new ticker symbol on May 14 and that is MHFI and our stock will continue to trade, obviously, on the New York Stock Exchange. And to celebrate this symbolic change, we'll be ringing the closing bell at the New York Stock Exchange on the 14th.

McGraw-Hill Financial is a company that provides essential intelligence to the markets it serves. Our vision is to be the foremost provider of ratings, benchmarks, analytics in the global capital and commodity markets. We will promote sustainable growth by bringing transparency and independent insights to the global capital and commodity markets.

We are fortunate to have assembled through our own innovation, as well as through various acquisitions, a unique set of the businesses. We have iconic brands and leading market positions in growing markets around the world. We are experts in creating and monetizing benchmarks such as the S&P 500, the Dated Brent oil price, the J.D. Power Customer Satisfaction Award, and of course, an S&P credit rating. Our benchmarks are integral to our customers' commerce, and unlike many other businesses, have remarkable perpetuity. These businesses require minimal capital investment while generating substantial cash flow. And we, as stewards of the shareholders, have demonstrated our commitment to maximizing shareholder value through thoughtful deployment of that cash towards targeted acquisitions, dividends, share repurchases and so forth.

We are excited about our new company and are eager to launch it to the financial world. To that end, we will be launching a new branding campaign in the fall to inform the markets about McGraw-Hill Financial, and as this slide depicts, one of the posters that will be prominently displayed as part of that campaign.

Okay. Let me now turn to the financial performance during the first quarter. Our full year 2013 guidance called for high single-digit revenue growth and approximately 15% diluted adjusted EPS growth. However, during the first quarter, we delivered 14% revenue growth and 29% diluted adjusted EPS growth up to $0.80 per share. While we are clearly off to a solid start, keep in mind that comparisons will become a bit more difficult because in each quarter of 2012, we delivered sequential increases in revenue and diluted earnings per share. But we're very pleased with the start to this year.

On this slide, these 2 pie charts should help put into perspective the revenues and the operating contribution of each of our business segments. Not surprisingly, Standard & Poor's Rating Services is our largest segment with each of the remaining 3 contributing a comparable level of operating profit. After a strong performance in 2012, Standard & Poor's Ratings Services is off to a great start in 2013. Revenue for the segment grew 20%, setting a new record for a first quarter. Segment operating profit increased 39%, and correspondingly, the operating margin increased more than 600 basis points to 46%. With inherent uncertainty regarding continued favorable issuance volume and mix, as well as additional compliance spending necessary to comply with the final CRA3 regulations, the 46% margin will likely moderate in the upcoming quarters.

This chart shows a relatively steady progression of increased issuance in the United States and a similar trend in Europe over the past 4 quarters. While first quarter 2013 U.S. issuance was down slightly, sequentially the mix was much more favorable with a 31% increase in high yield and a 16% decrease in investment grade. In addition, U.S. structured issuance increased in the quarter, driven by upbeat collateralized loan obligation, or CLO, and the commercial mortgage-backed securities issuance. This is a promising as securitization is a great sign that capital is being deployed into the economy and obviously it's creating the growth and consumer demand and some of the jobs that we're all looking at. And we are cautiously watching the CLO market to see if this growth will persist. We also are focusing in on was it merely a rush to get issuance to market before the final FDIC rules take effect that could require banks to incur higher deposit insurance premiums for their holdings of CLO. But we'll see more of that as we go forward.

As for the commercial mortgage-backed securities market, improving economic conditions, stabilizing delinquency rates and tighter spreads have increased attractiveness of this market. In Europe, covered bond issuance decreased 51% as a result of credit market weakness also bank deleveraging and the impact of ECB's 3-year long-term refinancing operations. Non-transaction revenue grew 9% and was driven primarily by an increase in the equity -- I mean, entity credit ratings as new companies came to market. Transaction revenue grew 36% and was driven primarily by increased issuance of high-yield corporates, corporate mortgage-backed securities, commercial loan obligations as well as bank loan ratings.

At this point, let me give you a look at the litigation picture and an update. As you know, there has been considerable activity on several fronts recently. With regard to the Abu Dhabi case, a case involving claims related to investments in the Cheyne SIV, structured investment vehicle, that was set to go to trial in the federal court in New York on May 13, the company has settled the case. In addition, the King County case involving claims relating to investments in the Rhinebridge SIV has also been settled. As such, we will be disclosing in our Form 10-Q that the company has settled these 2 cases for a total of approximately $77 million. There was no admission of liability or wrongdoing made in connection with any of these settlements.

Separately, on April 22, the company responded to the Department of Justice complaint with a motion to dismiss the entire complaint because corporate statements referring to independence and objectivity are not actionable under federal law. And this was determined by the U.S. Court of Appeals for the Second Circuit in a case involving the very same statements. In addition, the complaint does not include facts showing that Standard & Poor's did not believe its CDO ratings, collateralized debt obligation ratings, when it issued them nor that it had a specific intent to defraud CDO investors. The Department of Justice now has the opportunity to respond to our motion, and the arguments of both sides will be heard by the judge later in 2013. Additional information is available on all of these situations at www.standardandpoors.com/response.

In handling the State Attorney General's actions, the company removed all of the State Attorneys General actions, except California, from state to federal court and asked the federal panel on multidistrict litigation, known as JPML, to transfer them before a single federal court for all pre-trial proceedings. Oral argument has been scheduled by the JPML to be held on May 30. Seven State Attorneys General cases have been stayed pending the decision by JPML on our motion for consolidation and the company has filed motions asking courts in other states to do the same. In North Carolina, the federal court has denied the stay motion, but has not remanded the case to state court. And a federal court has granted the Connecticut State Attorney General's remand motion.

And finally, we have a solid track record, obviously, of defending the company and will continue to do so and aggressively. You can see the details of this track record on this slide, and we continue to believe we have strong factual and legal defenses in all pending litigations.

Let me now review our S&P Dow Jones Indices business. In the first quarter, organic revenue increased 9% to $86 million and the addition of the Dow Jones Index revenue brought total revenue to $115 million. The principal driver of the organic revenue growth was a 26% increase in assets under management in exchange-traded funds linked to S&P Indices, which reached more than $450 billion. Including the assets under management linked to Dow Jones Indexes, assets under management surpassed $0.5 trillion for the first time, reaching $525 billion at the end of the quarter. Trading volume of exchange-traded derivatives increased double digits, led by higher daily contact volumes at the Chicago Board Options Exchange for the S&P 500 Index Options and the CBOE Volatility Index, commonly known as the VIX. Revenue declines in mutual funds and modest data subscription growth tempered revenue growth. While the joint venture realized $67 million of adjusting operating profit, $49 million is retained by our company as 27% of the profits are forwarded to our partners.

The world's first and largest exchange-traded fund, the SPDR S&P 500, trading with a symbol SPY, reached its 20th anniversary, quite a milestone. Launched in January of 1993 with just $6.5 million in assets, the SPDR S&P 500 exchange-traded fund is now the world's largest exchange-traded fund with more than $130 billion in assets under management and the most traded exchange-traded fund with an average daily volume of 144 million shares, providing outstanding liquidity to institutional investors.

We see great value in forming partnerships with companies that can help us broaden our reach, our scope, our scale. The S&P Dow Jones Indices joint venture is a great example. We are pleased that after only 9 months since its formation, the integration of the 2 companies is substantially complete.

Another partner is the CBOE, a firm which we recently celebrated its 40th anniversary. We recently amended our license agreement with them to extend exclusive rights to certain security options such as the SPX, the most active U.S. index option, as well as the VIX to 2032.

And finally, we entered into a new partnership with the oldest exchange in Asia, the 136-year-old Bombay Stock Exchange, commonly referred to as BSE, to calculate, disseminate and license the widely followed suite of BSE indices. The partnership brings together BSE's closely watched India index Suite, which includes the SENSEX with the S&P Dow Jones Indices' 115 years of experience in publishing uncompromised global benchmark. A few partnerships, and I mean few partnerships, bring together over 250 years of experience.

Okay. Now let's move onto the S&P Capital IQ. In the first quarter, this business delivered top line growth of 5%, of which 3% was organic. Two key offerings, S&P Capital IQ Desktop Solutions and RatingsXpress, led the revenue growth. These results were offset somewhat by declines in revenue from equity research. S&P Capital IQ Desktop Solutions had a 10% increase in its number of issuers, and RatingsXpress delivered high single-digit subscriber growth. Last quarter, we told you that RatingsXpress is now available on Xpressfeed. This has been well received and we are winning new business due to the upgraded Xpressfeed platform. Operating profit decreased 9% and there was a decline in the operating margin as the segment integrates and develops newly acquired technology and products from R2, QuantHouse and CMA into various new product offerings.

I'd like to briefly preview 3 new capabilities launched this past quarter. S&P Capital IQ is known for the breadth and the depth of this data. We extended this capability with the launch of proprietary fundamental data for roughly 260,000 additional privately held Western European companies bringing global coverage to 500,000. The data is as complete as public company data and includes industry classification. So for example, when a client executes a data search, the answer will be populated with both public and private company information. Leveraging the capabilities we acquired with QuantHouse, we launched a consolidated real time data feed to complete -- to compete in this $2 billion real-time market. This new capability addresses industry demand for differentiated, low latency data at different speeds. Further leveraging the QuantHouse acquisition, we launched the Alpha Factor Library. Built from the industry's first Global Point-In-Time database, the Alpha Factor Library is an advanced web-based market analysis and research tool that is updated daily to provide statistical profiles, definitions and ongoing performance for hundreds of quantitative stock selection signals.

With that, now let me turn to the Commodities & Commercial Markets segment. Revenue grew slightly in the first quarter at 1%. Operating profit decreased 2%, resulting in a 90 basis point decrease in the operating margin. Platts continued to deliver steady growth with a 10% increase in revenue. This growth was primarily the result of growth in petroleum subscriptions. In addition, royalty revenue from petroleum derivative trading increased more than 25% and petrochemical product subscription delivered high single-digit growth. In an effort to improve our product offering, Platts is upgrading its price reporting capabilities by creating a system that will better handle compliance needs and includes new real time news capabilities.

In the global commodities market, continued volatility has increased demand for transparency and that is exactly why Platts introduced its electronic editorial platform to facilitate price discovery in the iron ore spot market. Platts is helping to facilitate transparency and efficiency by clearly showing the bids, offers and other information in the iron ore market. The information collected from Platts Editorial Window, or eWindow, has further enhanced the speed and efficiency of the Platts price assessment process, helping to transform the iron ore market from a long-term annual pricing system to a flexible spot market.

Commercial Market revenue decreased 8% in the first quarter. J.D. Power and Associates faced a difficult comparison to record results in the first quarter of 2012 as well as reduced licensing from recent award recipients. However, there were some offset at J.D. Power with revenue growth in China. McGraw-Hill Construction declined as difficult market conditions have continued to impact revenue there. On more promising notes, J.D. Power continues to grow its business in Asia and now derives approximately 30% of its revenue from Asia. Also, McGraw-Hill Construction launched 3 new products, Dodge BidPro, Dodge BuildShare and Dodge SpecShare, within the last 2 years. These products now represent 18% of McGraw-Hill Construction annualized contract value.

Now, that concludes my review of the company's result in the first quarter. And as we started off and as we were saying, we have a new name, we have a new ticker and we have a new brand identity yet our history of integrity and ingenuity preserves for 125 years. The common thread of our company has been the integrity and ingenuity of our employees. From the Industrial Revolution to today, they have delivered essential intelligence that customers and markets can trust.

As we look ahead, our long-term growth prospects are excellent because of the people, culture and capabilities of this company and the powerful enduring trends in our markets.

Okay. With that, now, let me turn the call over to Jack Callahan, Chief Financial Officer, for additional detail on those financials and then we'll be back for any questions or comments that you may have. Jack?

John F. Callahan

Thank you, Terry, and good morning to everyone joining us on the call. This morning, I want to briefly discuss several items on our performance and outlook for 2013. First, I want to recap key financial metrics in the quarter. Second, I will detail the onetime costs that were incurred during the quarter. And lastly, I will provide some additional detail related to the balance sheet and our 2013 free cash flow guidance.

As Terry just discussed, in the first quarter of our first year as McGraw-Hill Financial, we are off to a terrific start. Revenue grew 14% to $1.18 billion and adjusted operating profits grew 28%, driven primarily by the strong results in Standard & Poor's Ratings Services, the impact of the S&P Dow Jones Indices joint venture and the benefits realized from our cost-reduction initiatives. For example, adjusted unallocated expense decreased 2% in part due to our recent cost-reduction efforts. As a reminder, these unallocated expenses include approximately $20 million to $25 million of stranded costs due to the divestiture of McGraw-Hill Education. Overall, the margin expansion was significant as consolidated operating profit margins increased almost 4 points to approaching 34%.

The tax rate declined approximately 250 basis points to 35% while noncontrolling interests grew $16 million, both primarily due to the impact of the S&P Dow Jones joint venture. The tax rate also benefited from certain ongoing tax planning activities.

Adjusted net income from continuing operations and adjusted diluted earnings per share both grew 29%. The share count of 284 million shares did not change materially as the 5.9 million shares repurchased in 2012 were largely offset by record stock option exercises last year. All in all, a strong start to the year.

Now let me take a moment to run through the onetime costs we have excluded from adjusted earnings. McGraw-Hill Financial incurred $44 million in onetime Growth and Value Plan costs related to the separation activities of McGraw-Hill Education. These expenses primarily involved a shift to a new payroll provider, the closure of a data center and a separation of a human resource service center. Note that approximately 1/2 of these costs were noncash. Over the balance of the year, we anticipate that the remaining Growth and Value Plan cash costs will be approximately $20 million to $25 million. All in all, the onetime costs in separation are winding down.

In addition, the company incurred approximately $77 million of legal settlement costs associated with Abu Dhabi and King County cases. While the costs were reflected in the first quarter income statement, they will not appear in the cash flow statement until the second quarter.

Now I want to provide detail on several large cash-related items that occurred during the first quarter. Upon closing the sale of McGraw-Hill Education, we received the net proceeds of $2.2 billion. This includes gross proceeds of $2.4 billion less approximately $200 million of closing adjustments, primarily related to working capital true-ups. Since there was a sizable gain on the sale, approximately $300 million of taxes are due but have not yet been paid. In total, net proceeds were approximately $1.9 billion, which is consistent with the estimates we provided previously. Upon receipt of the cash, we immediately took 2 actions: first, we repaid approximately $450 million of commercial paper that was originally issued in the fourth quarter to fund the $700 million special dividend; secondly, we entered into a $500 million accelerated share repurchase transaction. As of the end of the quarter, we had an exceptional balance sheet with $1.9 billion of cash and only $800 million of long-term debt. Our overall debt is now reduced by 1/3. We intend to maintain a strong balance sheet going forward to both build the business, and as appropriate, return cash to shareholders.

I do want to review the impact of the accelerated share repurchase transaction. As it was executed in late March, the shares received had little impact on shares outstanding during the first quarter. The transaction will reduce diluted average shares outstanding in the second quarter by approximately 8.6 million shares. In addition, when the ASR is concluded, we will receive a modest number of additional shares. Fully diluted share count in the second quarter should be approximately 276 million shares, although it could be impacted a bit by ongoing option exercise activity.

Now I want to provide additional detail to clarify our 2013 free cash flow guidance. There were 3 key items that due to their timing will reduce 2013 free cash flow. First, while we took numerous Growth and Value Plan restructuring charges in 2012, not all of the cash was paid out in 2012. We estimate that approximately $100 million will be paid out during 2013. Second, because of Hurricane Sandy, the IRS allowed fourth quarter estimated tax payments that are normally made in December to be paid in February. This payment was approximately $130 million and was paid in the first quarter. Third, incentive compensation is expensed in the current year and paid out in March of the following year. Since 2012 performance was well above 2011, the cash paid out in March 2013 was approximately $70 million greater than 2012. Again, these incentive payments were made in the first quarter. Collectively, these 3 items reduced our 2013 free cash flow by approximately $300 million. After the impact of these items, our operating cash flow guidance remains $650 million to $700 million.

Summing up, we are off to a solid start to the year. We are maintaining our existing earnings per share guidance of $3.10 to $3.20 despite the loss of interest income as a result of the elimination of the $250 million 8.5% note from the sale of McGraw-Hill Education, which was included in our initial outlook. Let me remind you that the overlaps over the balance of the year become increasingly more difficult due to a very strong second half of 2012. Overall, we anticipate solid top and bottom line growth for the full year. Our balance sheet is exceptional and continues to provide us with considerable flexibility to enhance the value of McGraw-Hill Financial going forward. The first year of McGraw-Hill Financial looks promising.

With that, now let me turn the call back over to Terry.

Harold Whittlesey McGraw

Okay. Thanks, Jack. And again, we're obviously pleased with the start of 2013 and the first quarter earnings with revenues up 14% and EPS from continuing operations up 29% to $0.80. We're very pleased with how the businesses are performing, and we're making also a very considerable progress on the legal front.

Okay. With that said, let's open the call now to your questions or comments, and let me ask Chip Merritt to take charge of that part. Chip?

Robert S. Merritt

All right, Terry. [Operator Instructions] And now operator, we will take the first question.

Question-and-Answer Session

Operator

Our first question comes from Manav Patnaik with Barclays.

Manav Patnaik - Barclays Capital, Research Division

A couple of questions. So first, on the Ratings side, obviously the 600 basis point margin improvement, could you maybe just run through some of the drivers of that? I mean, was a big part of that just sort of the CMBS revenues that you didn't have last year?

Harold Whittlesey McGraw

Yes, Manav, that's exactly right. I mean, the big thing on the Ratings side is, besides the general issuance, part of it has been on the structured finance side. In terms of some of the high-yield issuance, some of the CLO, collateralized loan obligations, some of the commercial mortgage-backed security market, it was the structured finance side that really drove that part of it. And again, with U.S. issuance, corporate issuance, a little bit down and also in Europe, it was the structured finance side that really carried the day.

John F. Callahan

And I would just add that it was very strong cost management performance with costs growing well behind revenues, in part driven by some of last year's cost initiatives.

Manav Patnaik - Barclays Capital, Research Division

Okay. And then on the Platts side of the business, maybe you can help us understand if there's some seasonality about the trends. It seems like total growth has obviously been decelerating now and was just curious what sort of commentary you can provide there. And also if there was any contribution at all this quarter from the Kingsman acquisition?

Harold Whittlesey McGraw

Yes. First of all, Platts is a really very consistent, steady performer. Revenues were up 10% here. And again, what we're doing is expanding the product offering platform. We were talking about the iron ore market, but again, both in terms of oil, petrochemicals and the like, the pricing assessment and price discovery business we're up to providing some 12,000 pricing assessments and benchmarks a day and that's fueling spot markets literally all around the world. On Kingsman, obviously, we're expanding the portfolio in terms of the commodity side of it, and the sugar platform is one that's only getting stronger. So we're very, very pleased with where Platts is and how it's going. But it's, again, it's something that we'll keep in front of us all year long. But as we expand the platform base to more commodities, we're going to be focusing on the price assessment capability there.

John F. Callahan

The Kingsman acquisition specifically added about 150 basis points to the growth at Platts. So the organic growth continues to be quite strong, high-single digits. And now that, that business is approaching $1 billion, that's becoming quite a considerable business [indiscernible]

Manav Patnaik - Barclays Capital, Research Division

Okay, fair enough. And just last question. On the Indices side, you talked about the integration being complete. Is the potential cost takeout sort of already reflected in the margin this quarter or should we be expecting to see improvements from the levels here?

Harold Whittlesey McGraw

Well, you know us. I mean, we always want to try and improve upon anything and everything. But no, from a cost standpoint and the integration standpoint, you can consider at this point the integration that we were undertaking is complete.

Operator

Our next question comes from Craig Huber with Huber Research Partners.

Craig Huber

My first question, if I could ask. Last quarter, you guys provided detailed guidance by segment for operating profit growth and revenue growth. I was wondering if any of that changed in your guidance model given that you are keeping your EPS guidance the same?

John F. Callahan

Craig, at this point in time, I wouldn't -- it's only -- only have one quarter behind us right now. So I'd probably stay with our existing guidance by segment. Admittedly, maybe there's a bit more risk relative to some of the projections in Commodity & Commercial given some of the tough overlaps that particularly the Commercial business had in Q1 and then maybe a tad of upside in Ratings. But right now, I think that general -- the guidance we gave I think we'd stick with that.

Harold Whittlesey McGraw

Yes. And again, as Jack is saying, Craig, it's one quarter. And we're very pleased with that one quarter, but again, we will see as we go forward. And again, in 2012, as we were saying, sequentially, the -- each quarter got a little stronger in 2012. So we're going to have to watch the comparisons there. But obviously, a very strong start to the year.

Craig Huber

And my next question, please. Can you talk a little bit fuller about why your organic revenue growth in S&P Capital IQ only grew 3% in the quarter, please?

Harold Whittlesey McGraw

Again, it has more to do with the integration of the acquisitions and we're very pleased with the capabilities they're bringing us. But again, in terms of R2, QuantHouse, CMA, again it's extending and expanding our product base and that is very, very important to us at this point. We will look forward more to the second half of this year for contribution from that. But at this point, it's been a development of the product base. There's also, I mean, from a marketplace standpoint, it's a little bit of a weaker marketplace. You're seeing a fair number of layoffs on the financial markets side in all of that and so we're being impacted a little bit from that standpoint. But more importantly to us is expanding and developing the product platform. That will benefit us big time later on.

Craig Huber

And also, Terry, if you could just -- your second quarter sort of outlook internally for S&P Ratings transaction revenues, given the backlog you're looking at and we've seen the first month here, could you just talk about the puts and takes, how it's maybe changing better or worse versus first quarter trends?

Harold Whittlesey McGraw

Yes, and here, I mean, you really got to take a look at overall economic conditions. One of the things that we're seeing is by sovereigns, in particular, is an awful lot of emphasis on infrastructure financing and that should benefit us and we're going to need to see that new issuance continue. But again, we're benefiting right now from the resurgence of a structured finance market, especially in the high-yield area, bank loan ratings, CLOs and so forth. And that portends well because that means capital is being deployed, which is going to be very, very helpful to overall growth. But what we want to see pick up is we want to see more of the traditional corporate issuance, corporate securities, continue. And again, remember over the next 5 years, we're looking at some $46 trillion globally of new monies and refundings in that area and that's been a little quiet at this point. So we want to see a pickup on that side. But other than that, we want to really just focus in on general economic conditions and how capital is being employed. And right now, it's in some of the high-yield area rather than some of the more traditional areas.

John F. Callahan

And Craig, our guidance assumes pretty good growth in Q2 on the transaction side, but it does slow considerably kind of given the overlaps that we see in the back half of the year and also it's hard to look ahead that far, so -- but just keep in mind, the overlaps will get more challenging as we get deeper into the second half of the year.

Craig Huber

Understood. If I could just squeeze in one here on the legal front here. Can you update us real quick -- maybe I missed this -- the number of lawsuits you have still outstanding? And then also, Terry, can you just talk briefly about the dynamics behind the legal settlement you guys just announced for Abu Dhabi?

Harold Whittlesey McGraw

Yes. I mean, again, I mean, the legal situation overall has -- it takes time, for one. We do everything in the federal courts and anytime you pick up a suit, it takes almost 2 years to get before a judge. One of the nice things that we've benefited from is that 42 lawsuits have been dismissed or dropped almost immediately once it gets before a federal judge. And so we're pleased with that part of the record in all of that. But it just takes time. But we've got a very, very good track record on this and for good reason on this part. As part of the Abu Dhabi case and the King County situation, look, we were faced with going to trial on May 13 here in New York. And we looked at the situation, the case on the merits did not hold up. We felt very good about our position on this thing. And that's why it led to a very reasonable situation where, from a practical business standpoint, we decided to settle it and make it go away. And we've said all along that in situations, we're not against a settlement, but it's got to be a reasonable situation and we'll continue to work on that basis. But yes, we're very pleased that those have gone away now and it lightens the burden. Let me ask Ken Vittor, General Counsel. Ken, do you want to add anything to that?

Kenneth M. Vittor

We look at every case on its own and we made a judgment on a variety of -- using a variety of factors that it was in the best interest of the company, our employees and our shareholders to settle the Abu Dhabi and the King County cases.

Craig Huber

How many lawsuits do you have still outstanding, please? I'll let you go.

Kenneth M. Vittor

Approximately 2 dozen.

Operator

Our next question comes from William Bird with Lazard Capital Markets.

William G. Bird - Lazard Capital Markets LLC, Research Division

Jack, I was wondering if you could just elaborate a little more, you touched on your expectation for continued strength in transaction-based issuance. Just was wondering if maybe you and Terry could comment on the ratings pipeline. And then secondly, was wondering if you could talk just a bit about additional avenues for cost efficiency. You mentioned that $20 million to $25 million of stranded costs. Is that something that you can get out over time?

John F. Callahan

Let me comment first on sort of the issuance outlook. Just to reaffirm, I think looking for the first half of the year for 2013, I think it's going to be quite good. I don't know if Q2 is going to be as good as Q1, but I think it's still going to continue to be good, in part driven kind of what activity looked like last year. I think, we are, on the other hand, a bit more -- look, we do have some challenging overlaps, particularly as we get to the back half of Q3 and certainly in the fourth quarter. So we had extraordinarily robust activity, particularly in Q4 of last year. So I just think we're trying to be mindful of that overlap ahead of us. But for right now, I think we feel good about issuance and it's also nice to see us doing better -- or expanding our reach in places of structured finance where maybe we were not participating to the degree that we are now. So in balance, feel very good about the progress that we're making.

Harold Whittlesey McGraw

Yes, and Bill, as we were saying, the story in the first quarter is really on the structured finance side. And it's the high-yield market, bank loan ratings, CLOs, all that, CMBS that really fared well. We want to see more of the traditional corporate security market issuance start to come back. There's also another one that we need to keep an eye on and that's Europe. Europe is obviously, in the aggregate, in recession and all that. We need to see some pickup coming out of Europe. Europe is a bit flat right now and we want to see a little bit more resurgence there.

John F. Callahan

And Bill, in answer to your second question on cost, our guidance for this year does include some continued benefits from some of the cost actions that we have and are continuing to make. But we recognize longer term going to 2014 that we do believe that there's some additional cost opportunities and we're working on parts of that program. I do think we can get at some of these stranded cost issues. But it'll just take a bit of time to kind of work through that. So you should anticipate our continued focus on productivity going forward.

William G. Bird - Lazard Capital Markets LLC, Research Division

And then separately, a question for Ken. How do you see the timeline on both the DOJ case and the CalPERS case as you kind of look ahead?

Kenneth M. Vittor

Well, the DOJ case, as you know, we moved to dismiss the entire complaint on April 22. The parties will exchange briefs, the government gets to respond and then we get to reply. Oral argument has not been scheduled, but I anticipate it will take place sometime in the next several months. And then the timing of the case will be dictated by what happens as a result of the judge's ruling on our motion to dismiss. The CalPERS case has been going on for several years now and is currently on appeal on our dismissal motion under the anti-SLAPP statute. So it's hard to judge what the timeline will be on that until that appeal is resolved.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

Terry, the margin performance obviously at S&P has been very impressive and I understand there's incremental regulatory costs coming in. But I'm just wondering how you think about sustainable levels of margin in this business? And specifically, I'm wondering if recovery in the structured finance business could be a driver of margin upside potentially near term or over the next couple of years?

Harold Whittlesey McGraw

Yes -- no, no, no. We were obviously very pleased with the margin contribution in the first quarter for S&P Rating. As Jack said, there was a very defined cost improvement initiative that was undertaken that helped. But also, as you said, it was structured finance. And again, when you start talking about some of the high-yield bank loan ratings, CLOs, all of those kind of thing, they're going to participate at a higher margin level in all of that. So I was very pleased to see that. I think that 46% is a great number, but it might moderate a little bit from that. I mean, I think that's a little above where we anticipated. And as we see more traditional corporate issuance and hopefully Europe corporate issuance pick up, it'll be at a little bit of a lower-margin level. And so I would see the number coming off a little bit. But it's still going to be -- our anticipation it's going to be a pretty good number for the year.

Peter P. Appert - Piper Jaffray Companies, Research Division

I was actually, Terry, more interested over the next couple of years -- just the thought that if structured finance, which is still at a relatively low level, continues to recover, would that imply that there is still upside in margins over the next couple of years? And just what the appropriate level of margin for that business might be?

Harold Whittlesey McGraw

Yes, I mean I would be guessing a little bit on this one. I think right now, Peter, that the fact that we saw this resurgence in the structured finance area is very good because we weren't anticipating it to the extent that it came through. But it also, again, as we were saying, it really speaks well overall for the economy and especially here in the States that money is being deployed into a number of projects that are going to lead to more growth and hopefully jobs and all that. So it speaks well to some of our situation. We want to see that obviously also benefit the European market. By the way, the other one, Peter, that you mentioned was on the regulatory side. Again, that's an ongoing process and we deal with numerous regulators around the world and we'll continue on that part. But right now, I don't see that having a overburden to the margin levels. And at this point, I would say that somewhere in the mid-40s, early 40s, somewhere around there, if you're looking out over a couple of years that we'd be able to maintain that. But let's see what structured does for the rest of the year. And also, let's see where the resurgence in some of the corporate security markets is.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then on the regulatory side, can you just give us a little snapshot of the major things we should be watching? In particular, I'm wondering on the Franken issue what probabilities you're putting on that being implemented and how significant you think that might be to the business?

Harold Whittlesey McGraw

Well, as you know, on May 14 -- May 14, right, Ken?

Kenneth M. Vittor

That's correct.

Harold Whittlesey McGraw

On May 14, there's a rating agency roundtable in Washington, and I'm sure the Franken Amendment is going to get some attention and all of those kind of things. I see overall -- by the way, our relationship with the SEC has to be a very, very good one and we work very hard in making sure of that. We are as interested as anyone is in terms of strengthening the process of our ratings and all of those kinds of things and want the highest quality that we possibly can. Doug Peterson, our President of S&P Ratings, will be at that roundtable meeting and will express exactly our attitude towards how to continue to improve and build on and so forth. But at this point, it will be a steady process and everybody can weigh in, but we have the most vested interest in making sure that process improvement is at the highest level.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then last thing, can you just remind me, Terry or Jack, the non-transaction component of revenues within S&P, how much visibility is there on that looking out over the next year, let's say? And I'm asking this in the context of given how strong new issuance was last year, I'm wondering if that gives you better visibility in terms of the non-transaction revenues then going over the balance of this year?

John F. Callahan

Well, what may help that a little bit going forward is we've had a -- in some cases, while we've been growing the non-transaction part of the business in places, we've also had some falloff in parts of -- from some of the legacy issuance going back a little bit. And that leaky bucket part of that on the non-transaction side appears to be moderating. So obviously, we were very, very pleased with this non-transaction growth that we had in Q1. I don't anticipate that level of high growth for the balance of the year. However, we do anticipate it to be quite strong relative to what we saw recently. And I do think that may be a bit more stable as we start to get out into 2014. It's a little bit too early to be providing too much precise guidance in that area. But I think we feel a little bit more bullish about that than maybe we did a year ago.

Operator

Our next question comes from David Reynolds with Jefferies.

David Reynolds - Jefferies & Company, Inc., Research Division

Covering McGraw-Hill is often -- calls on a variety of skills and being a financial as well as a legal expert seems to be the order of the day. I'm not supposed to ask you any questions you can't answer, but I was wondering whether you could perhaps provide some color with regard to how you approach the strength of your balance sheet and any potential liabilities arising going forward from settlements or other legal events? How do you manage that level of uncertainty, I guess?

Harold Whittlesey McGraw

Well, first of all, and again I'll let Ken address sort of the legal outlook aspect of this. I mean this is a number of years, like 5.5 going on 6, since the financial crisis and overall things are beginning to moderate a little bit. Again, on legal suits, 42 have been dropped or dismissed. As Ken mentioned, you still have about 2 dozen cases that need to get before a judge and all of those kind of things. So we feel pretty good on that standpoint. I think the message that we're sending is that we're very excited about these businesses and we're doing well and we're off to a good start in 2013. And we're investing in those businesses. And when we got into December of last year, the $700 million special dividend was a sign that, I mean, you're not hoarding cash or setting up reserves and all of those kind of things. We're running the business to run the businesses. We were very pleased with the $500 million accelerated share repurchase that we announced recently and we'll see as the year progresses on that part. But no, I mean, nobody likes to get sued and all of these things, but we'll deal with it. And we'll deal with it because of the merits and the facts that are in our favor in all of that. But no, we're not -- from a balance sheet standpoint, how you deploy capital is a big question between and -- acquisitions, organic growth, dividend, share repurchases, we have been very mindful of all of those and that's where we're going to keep our focus. And we'll see in terms of share repurchase what more we might be able to do and the like. But at this point, our actions are all straight up and straightforward.

John F. Callahan

Look, we have -- we're running this -- we're going to manage this balance sheet like we're running and building this business. So we're lucky enough we have a fair amount of cash. We have a tremendous amount of debt flexibility in our balance sheet. And the reality is, with the margins, the return on invested capital we have in our businesses, we're going to continue to generate a lot of cash. So I think we're pretty confident that we have a lot of flexibility to deal with any of the opportunities or issues that we have in the coming years ahead.

Operator

We'll now take our final question from Craig Huber with Huber Research Partners.

Craig Huber

I have a follow-up question on this DOJ case. Are you guys aware at all of how the SEC -- have they involved much in this DOJ case, do you know?

Kenneth M. Vittor

No, they are not a party to the DOJ case.

Craig Huber

They're not involved in the background or anything as much as you're aware -- is that what you're saying?

Kenneth M. Vittor

I can't speak to what the DOJ and the SEC are talking about, but they are not a plaintiff or a party or a participant in the DOJ case.

Harold Whittlesey McGraw

No, and just the opposite. Just like the rating agency roundtable of the 14th of May, that -- the SEC is our regulator and it's our responsibility to do everything we possibly can to make that process smooth and that's exactly what we're going to do. And from a DOJ standpoint, as Ken said, we have very strongly gone back to our judge and made a motion to dismiss the entire suit in all of that and we'll see where that goes.

Craig Huber

My follow-up question to that, if I could, is you guys are much better aware of this than I am. But in the U.S., as you know, the SEC for years has been trying to open up the level of competition in the credit ratings business in the U.S. as has the regulators over in Europe for a number of years. Can you just talk about potentially the inconsistency perhaps if the DOJ got its way with this $5-billion-plus lawsuit, and it went to that extreme, $5-billion-plus, that extreme and it actually crippled S&P in the marketplace, that how that would potentially consolidate more of that business, if you will, around Moody's and Fitch. If your company really got crippled on that, it would actually hurt the level of competition. Can you just maybe talk about that level of inconsistency, please?

Harold Whittlesey McGraw

Well, again, in terms of motivations, you're going to have to ask them why. What we have done and worked very hard on is the how. How can you bring this kind of case the way you can? And the conversations that we had before they filed it with them was all talking about facts and figures about why they're wrong in all of that. But other than that, motivation is up in the air why they thought they could bring it against one or whatever. Okay, Craig.

Operator

That concludes this morning's call. A PDF version of the presenters' slides is available now for downloading from www.mcgraw-hill.com. A replay of this call, including the Q&A session, will be available in about 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 good day.

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