The McGraw-Hill Companies (MHP) Q4 2010 Earnings Call February 1, 2011 8:30 AM ET
Good morning, and welcome to The McGraw-Hill Companies Fourth Quarter 2010 Earnings Call. [Operator Instructions] I'd now like to introduce Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.
Thank you, and good morning to our global audience and thank you, everyone, for joining us for The McGraw-Hill Companies Fourth Quarter 2010 Earnings Call. I'm Donald Rubin, Senior Vice President, Investor Relations at 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, we issued a news release with our fourth 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 schedules, they can be downloaded at www.mcgraw-hill.com.
In today's earnings release and during the conference call, we are providing adjusted earnings per 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 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 for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at area code (212) 512-3151 subsequent to this call. Today's update will last approximately an hour. After the presentations, we will open the meeting to questions and answers.
It's now my pleasure to introduce the Chairman, President and CEO of The McGraw-Hill Companies, Terry McGraw.
Okay. Thank you very much, Don, and good morning, everybody, and again, welcome to our conference call. With me today is Jack Callahan, our new financial officer. He joined the company in early December, and we're obviously so pleased to have him onboard.
This morning, we will be reviewing the fourth 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, to take any comments that you have about The McGraw-Hill Companies.
Earlier this morning, we were pleased to announce fourth quarter 2010 results and provide guidance on another year of growth, earnings growth in 2011. 2010 was a very good year. Briefly, recapping our 2010 results, we reported fourth quarter diluted earnings per share of $0.50 and $2.65 for the year. On an adjusted basis, fourth quarter earnings grew by 7.8% to $0.55 compared to $0.51 last year and by 13.5% to $2.69 for the full year. There was dilution from acquisitions of $0.01 in the fourth quarter and $0.02 for the full year. Excluding the impact of acquisitions and divestitures, revenue in 2010 increased by 5.3%. And that took it up to $6.2 billion.
To speed the flow of information and increase transparency for the investment community, we added several new exhibits to the fourth quarter earnings release including a consolidated balance sheet and cash flow statements. To reflect the previously announced realignment of financial services, we also provided quarterly 2009 and 2010 recasted revenue and operating profit for our new segments, McGraw-Hill Financial and Standard & Poor's.
Starting with our 2010 Form 10-K, we will begin reporting our results in four segments. That would be Standard & Poor's, for the credit rating side; McGraw-Hill Financial; McGraw-Hill Education; and McGraw-Hill Information & Media. This chart illustrates the recasted revenue and operating profit contributions of each of the four segments in 2010. By forming McGraw-Hill Financial as a four-segment, we have created a billion-dollar-plus business that recasted, 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 2008 with the creation of firms, the fixed income and risk management group within the S&P Investment Services. We wanted to leverage our intellectual property and create new opportunities for growth by deploying a horizontal management 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 lines. Now by acting with a coordinated, collaborative and the integrated model, these assets are the foundation of a business that can be greater than the sum of the parts. We will drive organic growth through the development of new, integrated solutions from our proprietary assets and build new, innovative and differentiated solutions for clients to manage investments as well as trading strategies.
With the new ability to deliver a broad and deep suite of products for investors across asset classes, McGraw-Hill Financial is positioned to capitalize on growth trends in global markets for financial information, data and analytics. Capabilities are key to the new segment. With core capabilities, McGraw-Hill Financial will leverage content, data sets, analytics and technology in a coordinated framework from launching new products and services.
To help realize the strategic concept, Lou Eccleston reorganized the products and services from S&P Investment Services into four units, and integrated the fixed income and risk management operation into the new organization. The units representing the new integrated product capabilities are the following: One, enterprise solutions; two, benchmarks; three, research and analytics; and four, integrated desktop solutions.
In this chart, you can see how products and services are now aligned in the McGraw-Hill Financial segment. First, 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 and Standard & Poor's data and a broad range of third-party content.
Secondly, S&P Indices are the key to benchmarks. Our liquid, investable indices give investors the benchmarks to measure markets objectively and transparently for a growing range of asset classes. Third, research and analytics leverages proprietary data set, 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 managers, banks, private equity funds, credit professionals, advisory firms, corporations and universities worldwide.
In this new configuration, McGraw-Hill Financial is a $1.2-plus-billion business at the end of 2010, with an operating margin of 26.5%. That compares to revenue of $918 million in 2010 for Standard & Poor's Investment Services. The biggest swing factor is the inclusion in the new segment of the Securities Information business from S&P Credit Market Services, and that would be S&P RatingsDirect and S&P RatingsXpress.
McGraw-Hill Financial is predominantly a subscription business. Revenues from subscriptions produced about 74% of 2010 revenue. About 70% of revenue came from domestic sources in 2010 with international revenue growing at a double-digit rate last year as S&P Indices and Capital IQ continue to expand successfully in foreign markets. As recasted, McGraw-Hill Financial turned in its best performance in 2010 in the fourth quarter. Including $12.7 million in the fourth quarter revenue from the acquisition of Markets.com, revenue in the fourth quarter increased by 12.4% to $321.8 million compared to 2009.
Growth in the number of exchange-traded funds combined with a recovery in global equity markets produced a 21.6% increase in the fourth quarter in assets under management linked to S&P Indices. There was $300.3 billion under management at the end of 2010, and these would be exchange-traded funds based on the S&P Indices.
In 2010, the number of exchange-traded funds based on S&P Indices increased by 95 to 301. It is a record to build on, and you can expect more new index products in 2011.
Capital IQ experienced significant client growth, finishing 2010 with more than 3,400 customers and that's an increase of 15.8% for the year.
The integration of TheMarkets.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 momentum building at the end of 2010 and promising market conditions in 2011, we believe McGraw-Hill Financial 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 & Poor's, our Ratings business, in the new four-segment alignment. Standard & Poor's had a solid year and a strong finish to 2010. Recasted revenue grew by 13.4% in the fourth quarter and operating profit increased by 14.3%. Revenue for 2010 increased by 10.3% to $1.7 billion, and adjusted operating profit grew by 6.5% to $755.1 million. The adjusted operating margin was 44.5%, down 160 basis points from 2009.
S&P has seen the strongest activity in key market since 2007, 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 was set in 2007, but 2010 easily topped them. Issuance of $381.4 billion in 2010 compares to $243.5 billion in 2007. In the fourth quarter of 2010, there was $120.5 billion of worldwide high-yield issuance compared to the previous quarterly record of $106 billion in the second quarter of 2007.
The need for refinancing. The need for refinancing, tightening spreads and investors' appetite for yield spurred activity in the speculative-grade market. As this table shows, S&P's high-yield composite spread, obviously the excess interest rate over treasury bond, has been tightening since July and closed the year at 540 basis points. The investment-grade composite spread also gradually tightened since July and ended 2010 at 178 basis points.
U.S. high-yield issuance in 2010 was driven by refinancing, as companies took advantage of low rate to replace existing bonds with cheaper debt. According to a report from Standard & Poor's, called Leveraged Commentary & Data, refinancing accounted for 64% of U.S. high-yield volume. Bank loan ratings, primarily to extend maturities, also soared in the fourth 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 fourth quarter. It also was a record year for the U.S. public finance issuance. The $486.7 billion dollar volume issuance in 2010 topped the previous record set in 2007 by $18.3 billion.
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 to benefit from the same trends that contributed to Standard & Poor's success in 2010. The year is off to a very good start, and corporate issuance, including high-yield bonds, looks strong again.
There are several reasons why we think 2011 will be another very good year for ratings. It starts with refinancing. Refinancing requirements are substantial and will contribute to a healthy new issuance pipeline. Between 2011 and 2014, S&P estimates there are $5.6 trillion 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&P estimate the maturities in the range of $1.2 trillion to $1.5 trillion per year between 2011 and 2014.
Access to capital markets remains 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 U.S. gross domestic product to grow between 2.5% and 3% in 2011. Confidence of issuers and investors is improving. Companies are generating cash and are more confident about initiating expansion activities. The investors' search for yield will persist. In 2010, S&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 acquisition activity, our key driver to new bond issuance, is growing. Continued deleveraging by banks will also contribute to the growth of public debt markets. Some of the trends driving activity in the United States markets in 2011 will also contribute to international growth. We anticipated improved results in 2011 from most of our regions.
We look for a modest growth in the U.S. public finance sector after record issuance in 2010. S&P expects the current economic and budget climate should result in more borrowing 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 is excellent, as banks resume lending and investors' appetite for the paper is high.
Now let's shift for a moment and let me spend a moment just reviewing a number of the issues that we're dealing with. And let me begin with a synopsis of our legal situation. We start the year with 16 of our motions to dismiss granted in their entirety. Seven more lawsuits have been voluntarily withdrawn. Four of the dismissed case involved fraud charges. Clearly, we are making progress in the three broad categories that we used to keep investors up-to-date on the litigation situation involving Standard & Poor's and the corporation.
Let me go through them. First, in our first category are the underwriter claims based on the Securities Act of 1933. Here, the plaintiffs have alleged that Standard & Poor's is liable as an underwriter or seller of securities. To date, 12 of our motions to dismiss claims under the 33 Act have been granted. Three of these dismissed claims have been appealed. On January 11, the U.S. Court of Appeals for the Second Circuit heard arguments on the plaintiffs' appeal of the earlier dismissals.
In the second category, there are cases brought by purchasers of our stock. 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 the recent. In three of the four cases in this category, our motions to dismiss have been granted. The plaintiffs appealed two of those decisions and are waiting for decision from the U.S. Court of Appeals for the Second Circuit for those outcome. In the remaining case, we are waiting for a decision on our motion to dismiss.
In the third 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, a plaintiff's claims of negligence, intentional misrepresentation and negligent misrepresentation. The court also acknowledged that ratings are opinions about the future and therefore, not actionable unless plaintiffs can demonstrate that a rating agency did not believe the ratings to be true when they issued them.
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 at this time is the Parmalat litigation which got started in Italy in the fall of 2005. 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 two subsidiaries of The McGraw-Hill Companies should not have a material effect on our financial condition.
In recent weeks, we have seen favorable decisions by the state courts in Pennsylvania and California. A state court in Pennsylvania dismissed negligence claims and narrowly circumscribed a fraud claim in four 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 did not "truly believe that credit quality of the mortgage pool underlying each certificate, plus credit enhancement, if any, was sufficient to support its AAA ratings at the time the ratings were assigned." Our legal team does not believe that the Federal Home Loan Bank can meet this high standard.
In another case in California brought against Standard & Poor's and the others, CalPERS has alleged negligent misrepresentation in connection with the ratings of three specific SIVs. 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 the 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 on discretion when they will act on the lawsuits before them. But we believe the decisions that have already been rendered by the courts constitute meaningful precedent, which should help guide rulings on pending cases. In important ways, these rulings recognized limitations facing plaintiffs who seek to assert legal claims against S&P ratings. And that's why our overall assessment of legal risk in the various lawsuits remains very low.
We're also prepared to operate in the new regulatory environment, that's why Standard & Poor's has made significant investments in technology platforms and staffing and created what we call the QCCR governance and control framework. That QCCR stands for Quality, Criteria, Compliance and Risk. And each of those four groups operate independently of the Ratings business. We invested approximately $80 million in the QCCR framework in 2010, that's on top of $63 million in 2009, to meet new regulatory requirements. There may be an estimated $12 million to $15 million incremental increase in investments in 2011.
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 stepping up, and we welcome the move to a more centralized approach to regulation in the European Union, a harmonization process is very much necessary needed.
Even as the new regulations in Europe are coming on stream, 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 before, 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, introducing still more mandatory requirements and to allow time for the practical implementation of the recently passed legislation. They also pointed out that the political pressure to reform credit rating agencies, in particular in the sovereign space, is not grounded in any evidence that ratings in Europe have failed to perform according to expectations.
While we cannot predict when or if new regulations will emerge, we are carefully tracking developments and reviewing the important issues with decision maker. Any new law would require the approval of the European Parliament and the European Union state, a time-consuming process to say the least. We also believe our QCCR framework prepares us to deal effectively with the new and existing regulations in our global marketplace.
So let me sum up for Standard & Poor's in 2011. The legal risk remains very low. We are prepared to deal effectively with the new regulatory requirements. Continuing strong corporate issuance should produce high single-digit revenue growth. Operating profit should grow in the high single digits in 2011.
Okay. With that, let me shift now to McGraw-Hill Education. We finished ahead for the year in Education, even though our key markets and our business declined in the seasonally slow fourth quarter. Revenue decreased by 4.6% in the fourth quarter and increased by 1.9% for the year. Operating profit fell by 51.7% in the fourth quarter, but operating profit for the full year grew on an adjusted basis by 25% 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 fourth quarter, and these are all according to the Association of American Publishers statistics.
U.S. higher education grew by 6.8% in 2010, but sales fell 3.3% in the fourth quarter as second semester purchasing declined. We are assessing that situation but at the moment, we have more questions on that than answers. Fourth quarter comparisons in 2010 for McGraw-Hill Education were more difficult because of our robust performance in the fourth quarter of 2009, and that was in both el-hi and higher education market. As we had anticipated, a strong state new adoption market was key to our performance and to the el-hi market's growth in 2010. We captured about 30% of the state new adoption market, which is estimated at $850 million to $875 million in total and increased market share in 2010.
The gain by the McGraw-Hill School Education Group in the elementary-high school market was offset by a decline in testing. As a result, revenue for the McGraw-Hill School Education was flat in 2010. The decline in testing occurred primarily because of the planned discontinuation of custom contracts in three states: Arizona, California and Florida. All of these programs produced revenue in 2009. Our award-winning Acuity program, and this is the leader now in formative assessment market, continued to add new clients in 2010.
The McGraw-Hill Higher Education, Professional and International Group's revenue declined by 3.3% in the fourth quarter but increased 3.8% 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 overall growth rate.
In 2011, our position in the marketplace will be enhanced by our steadily expanding array of digital products and services and also by our new alliance with Blackboard, the nation's leading Web-based learning and management system. Through this alliance, we will be the only publisher to have a homework management product, McGraw-Hill Connect; and a custom publishing system, McGraw-Hill Create; integrated seamlessly into the Blackboard platform. As a result, we expect to increase the usage of McGraw-Hill Connect within Blackboard's large institutional imprint. Blackboard currently services approximately 80% of U.S. colleges and universities.
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 130 mobile phone applications were also available for download. By the end of the year, more to come.
Along with eBooks, our online resources in science, medicine, engineering contributed to our digital growth in professional markets. In 2011, expect expansion of our online subscription products, expansion in our eBook offerings, mobile applications and other digital services. Digital developments will increase our opportunity in international markets. The latest example is the recent announcement that we are joining with Wipro in India to launch a mobile learning platform called mConnect. This initiative combines McGraw-Hill's digital learning and adaptive educational software with Wipro's wireless technology capabilities to deliver supplemental educational services by cellphone to students and workers and those seeking to increase their job skills.
Incidentally, with 5.3 billion cell phones estimated in the world, there are 700 million cell phones in India at this point. By the end of next year in India, one in five, 20% of all cell phones will be there. By the way, just to take that a step further, China currently has about 800 million cell phones and combined, India and China represent somewhere around 42%, 43% of all the cell phones in the world.
In the elementary-high school market for 2011, we expect flat to minimal growth, a reflection of the continuing pressures on state and local budgets. Just as in 2010, the swing factor will be the 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 carefully is obviously the adoption market in Texas.
But the outlook for the state new adoption market in 2011 will depend to a greater extent on just how much Texas decides to spend for the program on this year's adoption list. The State Board of Education in Texas has recommended full funding for all subject categories, but the actual amount will obviously depend on the budget still to be developed and enacted by the Texas Legislature. Concerns over the state's projected deficit could limit funding. As a result, we probably won't be able to size the opportunity in Texas until we get into the second quarter.
So let's sum up for McGraw-Hill Education. Our market expectations, flat to minimal growth in the elementary-high school market, 4% to 6% growth in the U.S. higher education market. For McGraw-Hill Education in 2011, revenue growth, in the low single digits. Operating profit, a decline is anticipated largely driven by investments, especially for the digital developments. The decrease could range from mid single digits to high single digits.
And finally, now let's review McGraw-Hill Information & 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 fourth quarter decreased by 1.6% and declined by 4.9% for the year. But excluding BusinessWeek revenue, fourth quarter revenue grew by 7.6% and by 6.2% for the full year.
Operating profit, including the fourth quarter restructuring charge of $10.6 million, declined by 14.6%, but on an adjusted basis increased by 40.8% for the year. For 2010, operating profit increased by 73.1% and grew by 98.6% 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% compared to 9.7% in 2009. On an adjusted basis, the improvement was more pronounced, 18.8% versus 9% for 2009. The 2010 adjusted margin is the best Information & 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 content, including 24 new price assessments launched in 2010, will keep Platts moving ahead in 2011. Many of the new price assessments are first in their markets, an indication of Platts' ability to recognize and respond to these trends.
To add new capabilities in the energy markets, Platts also acquired BENTEK Energy in January and announced the acquisition of OPIS, Oil Price Information Service, which is subject to regulatory approval. BENTEK is a leading provider of fundamental data and analysis for the natural gas market in North America. The OPIS, the Oil Price Information Service, is a leader in news and pricing information for the wholesale and retail petroleum markets in North America.
Improvements in the domestic auto business contributed to J.D. Power and Associates fourth quarter performance and set the stage for more growth in 2011. Softness in the commercials construction industry still continues to hamper McGraw-Hill Construction activity in 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 Group has increasingly a digitally-based subscription business. More than 65% of the revenue in 2010 was digital. We expect that proportion to increase again in 2011.
Strong political advertising and improvement in national and local time sales at our Broadcasting Group produced a 21.7% increase in the fourth quarter revenue to $28.4 million and an 18.3% gain for 2010 to $96 million.
Summing up for the Information & 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 up our review of the operations. So let me sum up for the outlook for the corporation in 2011. We are very encouraged by our progress in 2010. It was the product and some important decisions and recovery markets 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 up both Standard & Poor's and McGraw-Hill Financial. We will also make important investments in digital products and services at McGraw-Hill Education to take us to a new level in a rapidly developing market. Continuing economic recovery and improving trends in financial markets are keys to our guidance for 2011, and that would be a range of $2.79 to $2.89 per diluted share.
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 two new reporting segments, Standard & 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 on Standard & Poor's and McGraw-Hill Financial. McGraw-Hill Financial is being charged a royalty for the right to use and distribute content and data developed by Standard & Poor's. This fee is recognized as non-transaction revenue for Standard & Poor's and as expense for McGraw-Hill Financial. The revenue and expense is then eliminated in consolidation for total McGraw-Hill Company results. The amount for 2010 was approximately $56 million, which we have broken out by quarter on Exhibit 7 of the press release.
Also, as Terry has indicated, S&P RatingsDirect and S&P RatingsXpress are now part of McGraw-Hill Financial. Previously, these products were reported as part of Credit Market Services' non-transaction revenue. As the result of this, as well as some other more minor movements, you will note that Standard & 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% of Standard & 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 of $15.6 million related to subleasing excess space in the company's New York facilities, increased by approximately $10 million to $46.7 million in the fourth quarter. For the full year, adjusted corporate expense increased approximately $37 million to $164.4 million. This year-on-year increase is largely due to increased incentive compensation as a result of strong 2010 results, especially coming off the depressed base in 2009 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 and our effective tax rate are expected to be remained relatively flat in 2011 versus 2010.
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 is free cash flow, funds we can use to make acquisitions, repurchase stock or pay down debt. We finished the year with $881 million in free cash flow. Given those strong results, we made a discretionary payment of $125 million to our U.S. pension plan in December. For 2011, we anticipate making only a relatively minimal contribution to the pension.
We do expect another year of strong free cash flow in excess of $700 million in 2011 despite an increase in capital investment. Let me discuss the drivers of the step-up in capital investment. Pre-publication investments were approximately $151 million in 2010, in line with previous guidance of approximately $160 million. This level of investment is our lowest ever and reflects the shifting of some investment from 2010 to 2011. We held up some programs in 2010, while the new Common Core State Standards were being finalized and then adopted across the country. To date, 43 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 Common Core Standards as appropriate to each program in our forthcoming product releases.
We are also stepping up digital investments as part of these programs. For 2011, we expect prepublication investment to return to a more normalized level. We expect to spend roughly $200 million to $225 million or approximately a $50 million to $75 million increase next year.
Amortization of prepublication costs was $246 million 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 million in 2010. For 2011, we expect capital expenditures of approximately $150 million driven in part by increased digital and technology-related investments. We continue to return cash to shareholders. In 2010, we returned $548 million through dividends and share repurchases. We did not repurchase any shares in the fourth quarter. But for the year, we bought 8.7 million shares for approximately $256 million, averaging $29.37 per share. That leaves 8.4 million shares in the 2007 program as authorized by the Board of Directors.
We plan to continue to repurchase shares at a measured pace in 2011. We are currently targeting to repurchase approximately half of the 8.4 million shares remaining in 2011, subject to market conditions. The share repurchase has been factored into our EPS guidance, though the impact is expected to be minimal.
We also recently announced a 6.4% increase in our dividend, our 38th consecutive increase. We are one of fewer than 25 companies in the S&P 500 that can make that statement. In 2011, our annual dividend is now $1 per share. Our diluted weighted average shares outstanding was 310.3 million in the fourth quarter, a 4.2 million decrease versus the prior year due primarily to the 2010 share repurchase program.
Overall, we continue to be very well capitalized, with net cash and short-term investments at year end of approximately $350 million. Cash and short-term investments at the end of the quarter totaled $1.548 billion, while gross debt comprised of approximately $1.2 billion in senior notes. Our debt is entirely in long-term unsecured senior notes, no commercial paper is outstanding.
This strong financial position enables us to selectively add attractive, strategically relevant businesses to the McGraw-Hill portfolio. As Terry mentioned earlier, we have already closed the BENTEK acquisition in 2011, and we hope to do the same with the OPIS, Oil Price Information Service transaction in the near term.
In closing, these last two months at McGraw-Hill 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 Bahash has left me a well-oiled finance organization to carry on into the future.
With that, thank you for joining us today. I look forward to meeting more of you in the coming months. And now, let me turn the call back over to Terry.
Thank you. [Operator Instructions]
[Operator Instructions] The question comes from Sloan Bohlen from Goldman Sachs.
Sloan Bohlen - Goldman Sachs Group Inc.
First, Terry, I was wondering if maybe you could start off with speaking to margins within the financial segment, I guess, basically the S&P segment. One, the margins look like they're a little bit weak in the fourth 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, again, what's influencing a little bit the margins at S&P have been some of the investments that we've been making all along, especially in the QCCR framework in terms of all the compliance and surveillance systems. And you have, for 2010, $80 million in that number. And then probably see another $12 million to $15 million incrementally for 2011. But even still, on an adjusted basis, you are north of 44%, albeit it was a decline from 2009, but it's large part because of those costs. As far as pricing goes, we definitely want to exceed inflation at this point. And if I summed it all up in terms of all the different asset categories for S&P, it would probably be about a 4% price increase for 2011. And we'll see as we go on. 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 more much more expansion into the broader wealth management and business development areas there. We're very bullish obviously 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 bode price and to be able to extend into a more scalable and addressable market.
Just to elaborate a bit on Terry's point on the cost side, particularly S&P, there was some select hiring particularly outside of the United States and there was also a little bit of step-up in incentive compensations, a good year, and also the layering of some more longer-term incentive-related compensation. So that also were factors too, in addition to the quality and control investments.
Sloan Bohlen - Goldman Sachs Group Inc.
And then Jack, just 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, but I was wondering, just by the different segments, if there's a way to break those out?
Sloan, you're asking within each segment in terms of subscription and non-subscription?
Sloan Bohlen - Goldman Sachs Group Inc.
No, just as a whole of those four major ones that you provided. And specifically, we're looking at the benchmarks as the one we're trying to split out a little bit?
You mean the benchmark business within McGraw-Hill Financial?
Sloan Bohlen - Goldman Sachs Group Inc.
The level of disclosure that we provided right now in terms of the international versus domestic, and the subscription, non-subscription is that 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.
And Sloan, 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.
Sloan Bohlen - Goldman Sachs Group Inc.
And then just one last question. I was wondering with regard to the investment on -- CapEx for digital investment in the upcoming year, I was wondering maybe if you could elaborate a little bit on what types of investment those are going to be? And will that be paced over the course of the year and maybe when we can expect some impact of that investment?
Well, most of that investment that we spoke to today relates to integrating more additional digital content into some of the education product 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 be some expansions in some of our digital offering, as Terry referred to, as it relates to our leveraging of Blackboard and our linking to mConnect, the big dollars that we're spending really relate more to some of the future programs that will be introduced in the coming years.
And increasingly Sloan, putting the education aside for a moment, all of these businesses are putting up 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 off of that is going to be very powerful. But we'll do what the market wants. And if it's hybrid print or digital, we're going to go any direction.
This question comes from Peter Appert from Piper Jaffray.
Peter Appert - Piper Jaffray Companies
Terry, 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, four or five years. And so I'm wondering, two things. One, 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 and low capital returns? And then related to that, longer-term vision, where do you think this business could be from a profitability standpoint in the context of these digital transformations you're talking about?
I think that there's been a lot of factors that's influenced educational publishers in the 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 of a fundamental education system. I think we're going in the right direction. I think some of the reformed initiatives, building off of No Child Left Behind, and getting into narrowing the skill gap that is increasingly growing in this country, gives us an opportunity -- there's skill gap everywhere -- and that gives us an enormous opportunity. And I think that a 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 two 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 training as well as getting thicker into the various disciplines of science, engineering, technology, medical and so forth. On the K-12 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 is a very exciting platform, and it's critical and vital to the success of our growth as a country on that part. If you get this wrong, how do you get -- how does a country grow. 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 skill gaps on.
Peter Appert - Piper Jaffray Companies
And is 15%, Terry, you think the right margin for that business longer term?
No. Clearly, as you become increasingly more facile in a digital environment, 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 improvements. So there is no let-up to the margin improvement that we've talked about in the past and that we expect going forward.
Peter Appert - Piper Jaffray Companies
And then one other thing Terry, the less active share repurchase expectations for 2011, if 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 about is 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 sure that we maintain flexibility. And we're looking at some transactions. We'll also be looking at organic 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're very excited about the 6.4% increase in the dividend, and we just want to make sure it's understood that we have a very strong penchant 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.
One of the goals here is to have a real ironclad balance sheet. It's one of the real strengths of the company to avoid -- it buys us a lot of flexibility. And if you think about it, it was really in the fourth quarter where we've had -- followed the back end of 2010, we really started to have a real step-up in our acquisition activity and significant activity. In 2010, we have announced two -- closed one and have another one pending for 2011. So we just believe that it's prudent to maintain our flexibility for the long term.
Yes, and that's for now, I will say, where we will go.
Peter Appert - Piper Jaffray Companies
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 & Poor's side. Remember, given the fact that banks are deleveraging and not lending at the same time, what you're seeing is either the introduction of new local bond markets such as South African, Saudi Arabia, the continuation of expansion in Malaysia, Indonesia and things like that. And that's why we're benefiting from so nicely in India. You're going to see more activity that way, and we're going to be opening up new operations for them. McGraw-Hill Financial is a huge opportunity. And one of the things -- one of the benefits 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 unlock some of the value that is there, making 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 products and services but also in terms of wealth management, business development, all of those kinds of things. So we're very focused on that side. Digitally, education, it's all things, and we're pushing very aggressively on that with partners, and Jack mentioned Platts and those acquisitions. But J.D. Power, also 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 in digital, the two operative words for us.
This question comes from Craig Huber from Access 342.
Craig Huber -
My first question has to do with each of the last two quarters, your Financial Services cost, looked like, up 13% to 14% year-over-year. Can you please give us some more details on the cost growth there, just to break it out a little better?
Yes, I think, again as the year progressed, we were obviously, as Jack was saying, there was the talent ramp up, there's the incentive compensation, there's the increased cost on the QCCR framework, and there was also some product expansion on that as well. But you've got to remember, as we came into -- we had a very good 2009 fourth quarter, and the first quarter was red-hot. Then the second quarter, significantly, slowed down. And we were trying to gauge at that point just where some of these was going. As you know, spreads were widening. And it wasn't until we got into June that we started seeing the narrowing of spreads, and then the rest of it is history. Corporate, munis, high yields, CLOs, sovereigns, they have just started to come very aggressively. And so with that increased revenue, on that one, there was also some ramp up on the expense side. 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 fourth quarter, if we're looking at the old segment, the Financial Services, it was impacted by the addition of TheMarkets.com, too. But the other drivers were more significant.
Craig Huber -
And then also, you mentioned earlier a price increase in Financial Services recipe, I guess, of roughly 4% for the new year. Were you talking just about the transaction side? Is it also about the same for non-transaction side, too?
No, that's in large part due to the transaction side, Craig. Again, we take a look at the overall increase on cost per regulatory and other 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 & Poor's for 2011, an aggregate 4% increase would be a good number to factor. But if that changes, then, we obviously will be telling you. But right now, I'd say an aggregate 4% is a good number.
Craig Huber -
But I guess you're suggesting the non-transaction piece what, roughly, half of that maybe -- ballpark?
Yes, about that.
Craig Huber -
And then also, I know you've 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 it's just too hard to tell?
Well, I mean it's certainly fluid, but I'm encouraged. One of the things that -- I mean, when you think about the regulatory setup and you go back to the end of '07 and '08 and '09, everything was coming in vertical steps. You had individual countries, you had different agencies like IOSCO and CESR and the FSA in the U.K. and so forth, the European Commission, so everybody had a different issue and 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 is already proceeded the financial crisis. We're in a much better place. 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 go it alone, but also to take into account a broader harmonization. So I think things are definitely improving on that part and will continue to. 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, where to amend it and so forth. And so I think that is going to be a process that's going to live with us 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 amendment going on, and I think we'll see a push for more harmonization.
Craig Huber -
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 that combined they're roughly 3x 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 as 2010. Now again, we have to watch a few people like California and Texas, and Texas in particular. But our thinking is that it's going to be better on that one. The open territories is 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 of good guidance on the open territories.
This question comes from William Bird from Lazard.
William Bird - Lazard Capital Markets LLC
I was wondering if you could just elaborate a little bit more on the new issue pipeline at S&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 in '11?
Well, the new issuance numbers that we've put out and that the market is putting out are pretty clear. I mean, we are seeing the continued pace from the third, fourth quarter of last year into the first quarter corporates. And again, in large part because of refinancing activity and also because banks deleveraging and not lending at the same level, the bond market is the market of choice. So corporates are doing really well, high-yield is really doing well, munis are going to do well. We're going to see significant more activity on sovereigns. We're seeing some activity in CLOs. In the structured finance area, you're starting to see besides asset bank, 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 of that. So we don't see much on that side. From a new issuance standpoint, it obviously looks quite good. And by the way again, 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 financing side is really a huge piece. With maturities between 2011 and 2014, we're looking at about $5.6 trillion of refinancing activity to the end of 2014, and we think that will continue. And the number of that we were using just as a gauge is about $1.2 trillion to $1.5 trillion a year through 2014. Refinancing is going to be a big piece.
And Bill, the 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 it's, building on Terry's comments, the 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 anticipating profits to be down year-on-year in the Education segment right now, and we're point to sort of a mid-single-digit to perhaps a high single-digit range of declines. So we do think this is going to be a segment that we're going to have to navigate as we go through the year and prepare for the future.
William Bird - Lazard Capital Markets LLC
Yes, I was wondering, I guess, specifically about higher ed which I thought Terry said he expects to be up kind of 4% to 6% in '11, and 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?
Well, it goes to the December. As we both know, from a market standpoint, after all of this wonderful growth and really being pushed of a really high enrollment numbers, it sort of hit a wall. We're still trying to understand that. There have been some suggestions that the rental market influenced 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 turn down in terms of ordering. And we're still working on that. And by the way, as Jack said, January is a little soft, too, on that front. 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 we'll be back on track. But the December, not the fourth quarter, really December was a market then and factor there that we all are trying to explain there.
William Bird - Lazard Capital Markets LLC
And just stepping back to buybacks, what would move you beyond the measured pace on buybacks?
Well, I think we've got to take a look, Bill, at the environmental growth, how things are progressing and best uses of cash. I think, and 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 into the year. If we complete the 4.2 million shares sooner, and all of that, and we think that that's extremely helpful to the overall picture. Could we go into the remaining 4.2 million shares? Sure, on that one. But I think coming into the year, we have high expectations for 2011. We want to build off of 2010, and that this is a good posture for us to take at this point, then we'll see.
This question comes from Michael Meltz from JPMorgan.
Michael Meltz - JP Morgan Chase & Co
Two questions for you. Following up on Peter and Bill's question, can you just tell us the cash balance, how much of that is trapped outside the U.S.? Is that perhaps an issue that mitigates repurchase somewhat?
We don't want to get too -- 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 the fourth 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 to make sure we have those chances down the line.
Michael Meltz - JP Morgan Chase & Co
And then the other thing, just a commentary on margins. If you didn't say this, but if I back into the -- you're saying S&P ratings revenues up high single-digits. I think the slides said profits up low double-digits. So you're actually pointing to margin expansion in '11 which is I'm happy to see. And I'm just wondering, can you just confirm that's what you're guiding to?
The guidance we gave was high single-digits for both top line and bottom line. So from the guidance, it's roughly flat margins. But obviously, 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.
Michael Meltz - JP Morgan Chase & Co
But the more important question, on the attributable margins that you're pointing to at Financials, I guess, you're calling it McGraw-Hill Financial after paying the royalty, those margins are now in the mid-20s. Where do you see that going? My sense is there's a big mix or probably 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 another way. As I was mentioning, those businesses for the most part were all, even though they are similar businesses in terms of data business, analytical business and so forth, serving similar addressable markets. They were all managed vertically, and all that. We have begun, as I already said, in terms of creating a horizontal integration to all of this. We're already starting to take out costs and you're going to see a lot more cost coming out on this one. 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 $1.2-plus-billion segment, with a 26.5% at this point margin, our expectation is for fast growth on the top line and definite margin expansion.
We will now take our final question from Doug Arthur from Evercore.
Douglas Arthur - Evercore Partners Inc.
Terry, on the refinancing pipeline, it seems -- I mean, you cited 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 '11? Or could that be an '12 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 again, there are 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.
Douglas Arthur - Evercore Partners Inc.
And just a follow-up on the muni side, I mean, I'm surprised that 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 take 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 the defaults and all of those kinds of thing. We look at all sorts of studies over the last 25 years in terms of different kinds of economic scenarios, albeit this is a more challenging one. We rate some 17,500 issuers in here. And the default rate, looking back, is about 2.5 defaults per year. Now an unrated municipal debt, it's a different situation. But in terms of that activity, the default rates are extremely low and all of that. 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. It's not that, I mean, I wouldn't put it in the same category as corporates or high-yield, but you're going to see growth there and we look forward to that.
Thank you. That concludes this morning's call. A PDF portion of the presenter slides is available now for downloading from www.mcgraw-hill.com. A replay of this call will be available in about two hours. On behalf of The McGraw-Hill Companies, we thank you for participating, and wish you a good day.
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