標普全球 (SPGI) 2003 Q1 法說會逐字稿

Good morning, and welcome to the McGraw-Hill Companies first quarter 2003 earning call. At this time I'd like to inform that the call is being recorded for broadcast and that all participants are in listen only mode. At the request of the company, we will open the conference to questions and answers after the presentation and instructions will follow at that time. Tone Hans the call for today's telephone participants McGraw-Hill has made the presenter slides available on the internet to do that go to http, colon, //www.mymeetings.com/nc/join.

I'll repeat it for those that would like to view the slides on line. It is http://www.mymeetings.com/nc/join. You'll be prompted to enter your name; the net conference meeting number is P as in Paul, H as in Harry, 379,5598. The password is McGraw-Hill. All capital letters, no space between McGraw and hill. The event type is conference.

This call is also being simultaneously website from McGraw-Hill's IR website and will be available for replay about two hours after the meeting ends both by phone and on the web for seven days.

If you need assistance at any time including having your volume adjusted higher or lower, press star and zero and I will assist you momentarily. I would now like to turn the conference over to Donald Rubin, Senior Vice President of IR. Sir, you may begin.

Thank you, and good morning . Thank you everyone in our global audience for joining us here at McGraw-Hill headquarters this morning as well as those that are on the phone and the web for McGraw hills first quarter 2003 earnings. I'm Donald Rubin, Senior Vice President for IR with me the day are Harold McGraw III, Chairman & President CEO and Robert Bahash EVP CFO of the corporation. This morning we issued a news release with our first quarter 2003 results. We trust you have all had a chance to review the release.

If you need a copy of it and the financial schedules that accompany it, they can be downloaded at www.McGraw-Hill.com/investor underscore relations. 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 description 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. And this regard we direct listeners to the cautionary statements contained in our form 10-K, 10-Q, 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 this morning on the call. However, this call is for investors and we would ask that questions from the media be directed to Mr. Steve Wise (ph.) in our New York office at area code 212-512-2247. Subsequent to this call. Today’s update will last approximately an hour. After our presentation we will open meeting to question and answers. Now my pleasure to introduce the Chairman, President and CEO of the McGraw-Hill Companies, Terry McGraw.

Okay, Thank you all very much and good morning to all of you. If you're joining us by the web cast or by telephone, we welcome you as well. We completed 2002 with a strong earnings picture. Our 11th consecutive year of earnings growth. And today we announced the release of our first quarter earnings report and we're quite pleased there.

Given the seasonal nature of the education business and some timing issues in terms of the economic recovery, this is really a Financial Services quarter. And Standard & Poor's and off to an absolutely terrific start, which is going to be another extremely good year for them and we're quite pleased.

I'm going to focus on the operations and go through a little bit of detail in detailing what the first quarter did and looking ahead for the rest of the year. The EVP, CFO Bob Bahash will follow me with chief financials and afterwards we'll go in any direction you would like.

Okay, including a 30 cent gain on the sale of Comstock, we reported earnings per share of 50 cents on the first quarter. Comstock was not a core asset, and lower margin business in our financial services segment, so we're pleased with the timely and profitable sale.

Earnings per share from continuing operation s in the first quarter came in at 20 cents versus 15 cents a year ago--a 33.3% increase. Income from continuing operations grew by 33.5%, and revenue for the first quarter was up 1.9%. And, again because of the seasonality of our business, the first quarter is by far the smallest of the year. Traditionally the first quarter is highly dependent on our Financial Services operations due in large part, again, to the seasonal nature of our education operations and information and media services. And given the law of small numbers, as small change can obviously have a major impact in a small quarter.

Still, it is always good to get off to a good start and we have achieved that with a very solid performance in Financial Services as well as some very excellent cost containment. Although we beat the first call consensus estimate by a penny it is clear as we look ahead, our year is back and loaded. For reasons that I'll go into, as we review our operations, we expect modest growth in the second quarter followed by a pick-up in the second half as the economy recovers.

Most importantly, our guidance for the full year has not changed. We still expect to achieve the 7% to 9% percent earnings per share growth that we originally forecasted for the year. And I might add remember that includes the five cents of noncash, non operating counting change in the pension assumptions.

I also want to reaffirm our forecast that I gave you also at the beginning of the year that we will achieve double digit top and bottom line growth for our Financial Services operations this year. Certainly an improving economy adds to our confidence. War and weather depressed the first quarter, spring is here the first phase of the war is over. Oil prices have retreated from their $31.00 per barrel. Interest rates and inflation are projected to show little movement from their current levels.

Our economists point out that durable good orders were strong in March which means capital spending on equipment should resume its growth in the second quarter. Inventories are in good shape and we're seeing better ordering in the high tech industry.

We can also look forward to fiscal stimulus from the government and adding this up , our economists see a pick-up in the second half with an annualized growth somewhere in the 3.5% to 4% range, after real GDP only increased 1.6% for the first quarter.

Okay. With that as a backdrop, let's take a look at each of the operations and let's take a look first, at Financial Services. We started the year with a solid performance in this segment. Revenue grew by 8.3%, operating profits increased 9.6% and operating margins were 36.7 versus 36.3 a year ago.

We expected ongoing operations in this segment to produce double digit top and bottom line gains this year and they did so in the first quarter when you exclude money market services international from the 2002 results we divested MMS international in September 2002. These results were in line with our expectations.

Importantly the results are also a testament to the effectiveness of our diversification strategy in our ratings business. As many of you know we have a long-standing strew to diversify our revenues in this area. We do that by expanding globally, now in 32 locations around the world, by creating nontraditional pros and services by smoothing the rev new recognition stream through contracts and other fee arrangements.

That strategy served us well again in this quarter and the growth in ratings revenue was outstanding. We grew in all areas, but the strength in this environment continues to be structured finance, public finance, international markets, and nontraditional ratings and services.

We had solid double digit gains in all of these areas but we are particularly pleased with the outstanding results in structured finance which produced robust double digit growth.

There was strength globally in the structured finance market. Residential mortgage backed business, was particularly strong. We also had some very good results in the asset backed market, particularly in credit card and student loans. We very much like our prospects in structured finance going forward, but I will touch on that in just a little bit more detail in just a moment.

And the only slow spot in the structured market occurred in the asset backed commercial paper area. The slowdown in this very small part of the market reflected issue or uncertainty over the application of these new accounting rules for special purpose entities--that's the FIN-46 rulings.

I should point out that fees from asset backed commercial paper market are dwarfed by other assets of the structured market. We don't see in market segment as an area of vulnerability. As a matter of fact, there may be an upside in financial institution we structured these instruments or ship them into longer term borrowing. This all has to do, obviously, with off balance sheet financing issues for banks.

Our foreign source revenue grew even faster than our domestic revenue and now represents 33% of ratings total. In the first quarter last year, foreign source revenue represented a little over 30% of the mix. We also saw pick-up in the high yield market. As some investors preferred the risk and return offered by these kinds of instruments, rather than some of the uncertainty in the equity market and that was a bit of a surprise to us, but welcoming.

Let me quickly recap new issue volume for the first quarter. Dollar volume in the United States, new issue market, increased 11.1%, even as corporate issuance declined 5.2%. I do believe that this is one to watch because I think this is going to be an area of upside here. And I think it's fair to say that some of that time can be attributed to the war. We believe some corporate treasures are holding back into the situation is a little more clarified. And again I believe this is an area of upside and within to watch.

As we predicted, municipal issuance grew, public finance was up 21% in the first quarter. Asset back issuance was up 21.1%. Mortgage back issuance was up 38.8%. And in a very strong showing European new dollar issuance was up 39.2%.

In looking ahead, we're on track for the full year. The refinancing boom will be with us longer than we originally expected. That trend will now carry well into the third quarter instead of tapering off at the end of the first half and this is going to be a real plus for the residential mortgage backed market.

The structured finance market looks very solid to us on a global basis. Securitization has become a major funding tool in Europe. Manufacturers are embracing it, as are leasing companies, mortgage lenders. Securitization is also playing a role in balance sheets in the banking sector.

The commercial mortgage backed market was strong in the first quarter and continues to show promise. The asset backed market will continue to grow here and abroad favorable funding costs will drive the auto asset backed securities issuance and the need to refinance credit card debt will also bolster the market. Public finance will grow as states turn to the market to avoid raising taxes or to alleviate some of that pressure.

And we still expect improvement in the corporate market later this year as the economy improves and capital spending starts to pick up.

For a longer term prospective on ratings, I suggest you take a look at Don Rubin’s IR fact book. It's been posted on our IR website. We have hard copies here for you. And I think you will like very much the improvements that Donald has made to it, in terms of talking about our markets there is an awful lot of information.

Here you'll get a look at the ratings market since 1997 and standard and Poor’s market penetration each year by category. You will see our market penetration rate of the ratable market has been steadily increasing. For example, there's a chart showing the growth of U.S. mortgage backed market by 2002 the market has grown to $462b and S&P rated 87% of that dollar volume. And you can access this information on our information relations website by going to the McGraw-Hill website and logging on to the IR portion.

One final comment on ratings and the regulatory environment. We provided testimony to the senate, to the house, and to the securities exchange commission on how Standard & Poor's functions in the capital market. We've been very active in the dialog and, indeed, welcome the opportunity to clear up any misconceptions about the ratings process.

As the next step, the SEC will soon issue a concept release. We don't have a date but we think it could be any time. It would not be appropriate to probably speculate on what the concept release would contain but in broad terms we expect some recommendations on the role and the function of rating agencies and a call for public comment. The process, the issues of the concept release, the call for public comment, the creation of proposed rules, the call for final comment and perhaps more revision also probably consume most of this year and maybe in to next.

The fact that the SEC is not rushing to judgment is a sign that the process is being conducted with great care. We certainly welcome more transparency in the designation process for new nationally recognized statistical rating organization. And we're encouraged that the regulators have recognized the effective role rating agencies have played for many, many years in the whole capital formation process. So we'll just have to wait what the issuance on that concept release is.

In investment services cutbacks at the retail brokerage firms have had an impact on S&P sales in equity information and services. But we're seeing growth index services, assets under management based on S&P indexes hit $60.4b at the end of the first quarter, up from $51.2b for the same quarter last year.

And we've also seen a pick-up in the trading of contracts based on the S&P indexes. The S&P 500 E mini set a new daily record on March 17th when 1.1 million contracts were traded. 1.1 million contracts traded. Volume is averaging 600,000 contracts per day, up from 450,000 contracts in 2002. Very impressive.

S&P 500 options are trading briskly at the CBOE, averaging about 145,000 contracts per day, up from 90,000 a day for the same period last year. And, of course, we're paid each time a contract is traded. And on a basis points for assets, under management in exchange traded funds. We're continuing to build this business.

At the end of April, Rydex global advisors will introduce a new exchange traded fund. It will be called the Rydex S&P Equal Weight Exchange Traded Fund, which is an equal weight version of the S&P 500. We continue to seek new outlets for our independent equity research. Earlier this month Standard & Poor, announced a plan to provide equity research

services to Nordea, a leading financial services company that operates in Finland, Norway and Sweden. S&P will provide research and commentary on 120 U.S. and European stocks for Nordea, whose institutional customers will gain direct access to our analysts.

As the number one independent research house on street, S&P is focused on creating new opportunities for its services. As firms evaluate what steps they will take, as part of the settlement with Attorney General Spitzer and the SEC, S&P is making its case for create more value. We've been discussing aspects of this settlement with all the firms involved in the proceeding in anticipation of the announcement made by the SEC yesterday.

As you know, Wall Street firms must within nine months spend $432.5m over five years, to provide customers with this independent research. These firms are already our customers so a foundation is already in place. Now we'll just have to see what can be done to add to it. We built no revenue assumptions into our 2003 budgets. So we'll keep you posted ton progress for that.

So, summing up for the Financial Services segment, we're off to a good start. And we're very pleased with that. We expect to see continued strength in international markets, particularly in structured finance. We fully expect operations to produce this top and bottom line double digit growth this year.

Okay. Let's go over to the McGraw-Hill Education segment. Revenue here declined 1.6% in the first quarter. The operating loss increase by 1.4%. Revenue at our higher education, professional, and international business increased 2.9% and revenue for the school education group was off 6.3%.

First quarter results are never very indicative of what will happen in the education market. And that's obviously true, again this year. Softness in children's publishing, supplementary products for the educational dealer the home and school markets was a key reason for the first quarter declined. Year over year comparisons were more difficult because we shut down an activity book product line late last year.

We're getting excellent early results with our social studies programs in the secondary market. We're also continuing to have wonderful success with our Everyday Math program which sold well in the first quarter. You may recall that both Everyday Math and Impact math, which is our mild school program from Glynco, were recently adopted by New York City as part of its curriculum reform. And we just received the city's initial order and planning and this massive adoption is well underway.

What's clear right now is the noise level in the marketplace about educational funding is obviously unusually high. And it comes at a time the states are trying to come to terms with declining tax receipts and the requirement to produce balanced budget. We've seen various estimates of the states total budget deficit that represent the aggregation of projections made at different times in using different parameters.

46 states operate on a fiscal year that ends in June, so many legislatures are now meeting to deal with obviously the budget shortfalls for the year just about to send and to create new budgets for the fiscal year starting on July one. So the timing of the process makes it very hard to predict that outcome now.

The latest information we have is that 26 states, including the District of Columbia are in unbalanced fashion, 24 states are in balanced capabilities. For the next two months I think is going to create an awful lot of noise, a lot of debate as those come to conclusion.

Here's how we assess the situation at this point. First, not all states are going to resolve all the deficit issues exclusively by cutting costs. We expect solutions also to include raisings fees, increasing taxes, and obviously financial engineering, raising money in the public finance market, thus the strengths that we're seeing in the municipal financing area.

Secondly, education is a national and state priority. At a recent state of the states review held by the nation’s governors, all of the governors cited education as an overarching priority. Furthermore the vast majority of the governors emphasized the need to protect educational funding by minimizing cuts and safeguarding base level funding.

Third, even when budgets are reduced, the cutback in education will be less severe. And even when total education spend something reduced, in structural materials are usually particularly in adoption states, where funding for instructional materials are very visible.

Fourth, the focus on state education budgets overlooks the importance and the continued strength of local funding. Property taxes are a key factor in local funding and the housing market has been solid, local funding plays a significant role in instructional material funding particularly in the open territories. Consider what is happening in Kentucky, which recently postpone its K-8 math adoption. That was worth about $13m this year. The high school market in Kentucky was always funded locally. And we still expect local school districts will purchase math with local funds so some of that revenue will be generated in Kentucky this year.

And fifth and finally, the infusion of federal funds from the No Child Left Behind act will also be a factor this year. We do know that 30 states have already received $541m for implementation of the reading first programs, creating the equivalent now of a very large and eventually national adoption program for reading in the K-2 market. States are beginning to make sub-grant distributions. A list includes eight states. Florida, Illinois, Michigan, Pennsylvania, Ohio, Alabama, New Jersey, and California.

The entire opportunity create by reading first won't be realized in the first year but we believe enough funding will reach local school districts to help mitigate state funding issues. After administrative costs the funds will be spent for materials, assessment, and training.

We believe McGraw-Hill Educators is particularly well positioned to provide the materials and services schools will need to meet the program requirements. We know at this moment, for example, that tests from CTB McGraw-Hill have been approved for mandated reading first assessments in ten states, with more to come.

We're starting to see some orders based on reading first funding. For example, ten schools in Mobil, Alabama, used reading first funds to place an order for our Open Court reading program, our phonics based program. This is new funding.

A lot of these state funding issues are not going to be resolved for a couple of months. Take Texas, where the legislator is now considering school budget for materials. The current regular session of the Texas legislators ends on June 2nd.

We expect the debate on educational funding will come right down to the wire. In recent years, Texas has tended to place orders late in the second quarter so the legislature’s decision could affect the timing and size of the sales in the second quarter, as well as the third quarter and the year.

Given the complexities and uncertainties, we still expect the K-12 market to grow this year. We continue to like our prospects in higher education, professional, and the international markets. Our higher education products are traveling well, and the combination of text and technology has creates a competitive advantage to the marketplace both here and abroad.

All our major titles come with wrap around software. In the new investor fact book you will see examples of how we enrich some of our texts and there's an example of McConnell and Bruse Economic text with tutorial to course specific news feeds.

We still believe the higher education market in the U.S. will grow 6% to 7% and we expect outperform it.

Summing up for McGraw-Hill Education growth in the market, as federal funds help to mitigate the state funding issue, 6% to 7% growth in hire education and, growing application of technology to create a competitive advantage , especially outside the United States.

And now let's finish up with our last segment, information and Media service, revenue for the segment decreased 5.2% but operating profits increased by 4.3%.

This management team continues to do an excellent job in managing costs and improving our leverage.

As a result, the operating margin in this segment improved to 7.2% in the first quarter versus 6.5% a year ago. And let me assure that in this rigorous cost management will be a hallmark of this segment all year. In assessing our first quarter results let's not forget that advertising this year actually got off to a very promising start in January, following pick-up and improvement in the fourth quarter last year. The early signs for us were very positive. Business week add pages were up 11% in January, business broadcasting, rather, benefited from the super bowl, but we all are aware of the impact of the geopolitical event.

As a result, advertisers pulled back. Broadcasting promise started to flatten out and revenue for the first quarter was flat versus last year. With one more issue in this year's first quarter, business week finished ahead by 2.2% in North America but revenue overseas particularly in Europe fell off.

Ad pages, in most of our other publications were also off. Architectural Record performance is a notable exception. This publication edited by Robert Ivy is one of our jewels. That's why architectural records recently received three major industry awards, for best editorial writing, best single issue of a magazine and best seemed issue.

In general, though, we are expecting the first quarter softness in advertising to have some spill-over effect into the second quarter. For example, in April now, Business Week ad pages were down 30.3% and the publication after four months trailed last year by 10.3%.

The real question now centers on the pace of recovery, and especially given some of the conclusions of some of the geopolitical events. And looking at this pace of recovery, we see some very reassuring signs. Pacing has improved at broadcasting in May.

It's up in the mid single digits and the quarter looks positive. What happens in June, obviously, will be very important. There are some very early signs of pick-up in later in the second quarter at Business Week. April, obviously, was off. But we're starting to see a pick-up in May as well as in June. Advertisers who pulled back are, or waited on the sidelines are starting to come back. We're encouraged and seeing May and June again bookings picking up.

Business Week has retained its lead as the business selling business magazine in the world period. Circulation is at an all-time high. At 987,000 in North America. That accomplishment, even though we have raised our annual and three-year subscription prices, one year subscription is up 9%, $59.97 and the three-year subscription is up 20% to $119.97.

We are well positioned to benefit from an upswing in advertising. We believe the stage is being set right now for a pick-up in the months ahead. In our business to business verticals, we're looking for some improvement in construction energy, and aviation, but softness in the clinical publications and health care area will probably take a little bit longer.

Let's sum up for Information and Media services. Stringent cost controls will stay in place all year. Second quarter advertising starts slowly but there are signs of recovery in advertising and late in the quarter and clearly our expectations are higher for the second half.

And, therefore, summing up for the McGraw-Hill companies, overall, our guidance for the year is unchanged--7% to 9% EPS growth, which includes that 5 cent noncash, nonoperating charge. Due to geopolitical events and resulting effect on economic conditions, we do see some shift in quarterly performance into the second half.

Continued strength in Financial Services with continuing operations producing double digit top and bottom line growth for the year. Early signs of a second half recovery in advertising. Federal programs will help mitigate state funding issues in the K-12 market which will show year over year growth and the higher education market will grow in a 6% to 7% range. Okay. That completes the operational report for the first quarter. Let me turn it over to Bob to give some key financials then we'll go in any direction you like. Bob.

Thank you, Terry. The company continues to maintain a strong financial position. So let's start this morning by reviewing some of the key factors that contribute to this strength. Total debt at the end of the first quarter was $591.7m, that's $13m higher than year end debt, and almost $494m lower than the debt at the end of March of last year.

We've kept all of our debt in short-term commercial paper to take advantage of low interest rates. As a result, interest expense decreased 58% to $2.7m in the first quarter. That reflects the reduction in interest rates as well as debt levels from last year.

Our average interest rate on commercial paper borrowings for the first quarter was 1.3% and that's down from 1.9% last year. In the last two years, as part of our best practices effort, we've improved our collection process for accounts receivable. We made some more progress in the first quarter.

As a result, cash provided by the decrease in accounts receivable in the first quarter was $56m more than the same quarter in 2002. We also reduced our blended tax rate from 37.5% to 37% in the first quarter. You should anticipate that lower rate for the remainder of the year.

The primary reason for the change in the effective tax rate was an increase in our foreign source income, which is taxed at lower rates than the combined federal and state rates we experienced here in the United States.

Our capital expenditures increased in the first quarter. Cap Ex, which we spent on property and equipment, came in at $13.2m which is up almost $4m from the same period last year.

Spending in this category will ramp up later in the year as we prepare to occupy our new building in London's Canary Wharf. Construction is being completed and we expect to start moving employees into the new facility at the beginning of next year.

With the expected $50m required for the Canary Wharf build-out we estimate capital expenditures will reach $175m for the year.

Republication costs for the first quarter were $38.6m which is up $3.7m for the period. Year two spending will ramp up. We expect to spend $285m this year.

Now, again, looking at some noncash charges. republication amortization declined in the first quarter to $31.6m. Last year it was $33m. Depreciation was $21m, which is down from almost $24m a year ago.

And amortization of intangibles is $8.7m, down from almost $10m last year. Now, you will also see $7.7m for additions to technology projects in the cash flow statement. This is down from $21.9m in the first quarter last year.

A lot of this has to do with projects for the education segment as well as the Financial Services segment including the global transformation project in McGraw-Hill Education.

DTP has recently undergone an intensive review. To support the global growth objectives we've decided to expand DTP project and scope and complexity. We anticipate that the enhance project will cost $180m, which is up from an estimated $140m, which we previously forecasted.

The increased spending will provide enhanced features for customer self-service, The development of an electronic business to business catalog, and new and enhanced features for the global data warehouse. These among the features that will improve efficiency and provide the basis phone creased revenue.

Our current schedule calls for a rollout in the U.S. school units in 2004 and the higher education in professor publishing units in 2005. The international units will be completed during the 2005-2006 time period, at which time we'll begin the realize the net benefits from implementing the system on a global basis.

Now I'll spend a minute on share buy backs. We've been active in the first quarter repurchasing 1,584,000 shares for $84.8m which is an average of $53.57 per share. There were no purchases in the first quarter of last year. For the full year we still expected to buy back between 3m to 3.5m shares, which what we have been doing in the past couple of years. Thanks and Back to Terry.

There we have it. Again, we're very pleased with the start of the first quarter. Small quarter. But still it gets us off to a good start. We think the year is going to be build for us, we will be back ended. There will be some shift into the second half, but our guidance for the full year is fully intact and we expect to do that. With that we can go in any direction anybody would like. Don.

Thank you, just a couple of instructions for our guests here in the meeting. Please use the microphone when asking our question so our phone participants can also hear the question. We'd please you may state your name and company. You may signal when you have a question so he can bring the microphone to you.

For the phone participants please press star one you wish to enter the queue and ask a question. To cancel or withdraw the question simply press star two, if you have been listening through a speakerphone but would like to ask a question we ask you lift your hand set prior to pressing star one and remain on the hand set until your question has been answered. This will ensure good sound quality. We'll start with their questions in the room.

Two related questions. Especially the shift that you are talking about into the second half with relation to guidance, is that more due to perhaps the school business a little bit worse than what you thought at the beginning of the year? Or is it more advertising related and just, secondly mix between local and state funding; can you give a break down what that mix is in total?

Sure, okay. I think that, you know, clearly as we came into this year our expectations, for the recovery, to continue, we were showing such terrific results on the advertising side on the fourth quarter, and as I was saying it carried over into January. As the war effect became evident it dried up that advertising market. February, March, and April were very disappointing.

What we are seeing is a pick-up in May. And now both at broadcasting and at our publications, most notably business week. And it's carrying over into June. So what I expect at this point, some of the timing issues there, you know, will continue to ramp up. Given how we think about the second half, that, you know, that on an annualized basis we could be running around 3.5%, 4% GDP growth.

We expect that to carry through into the second half. So it's a timing issue a little bit in terms of the recovery. On the educational funding, we don't have issues that way in terms of the higher education (inaudible) international, they behave a bit differently than the K-12 expenditures.

In the K-12 area, obviously with all of the issues that the states are facing, you know, this period coming to the end of June is a very noisy one and as we all follow the budget numbers you're hearing an awful lot of back and forth about dire consequences, what we'll do, will we raise taxes, will we deficit finance, all of these kind of issues.

What it's going to do is create from an ordering and ordering fulfillment standpoint pressure as we get towards the end of June. So if they are going to be late in terms of making their conclusions, it is going to delay us a little bit in terms of some of the order and order fulfillment.

It's always been an issue between June and July in terms of timing. Of when you get the orders and when you actually fulfill them. But now, given the fact that the budget process is taking longer, that's just spilling over and shifting into the third and the fourth quarter. So, again, on a full year basis we don't expect those components.

When we start talking about state funding, and local district, you know, funding, again, it really talks about the adoption states versus the open territory. Local funding is usually more prevalent, you know, locality by locality, where there is, you know, some very strong local emphasis on those issues. The big numbers are clearly at the state level. And where, you know, the larger states have very orchestrated adoption policies in terms of ordering fulfillment. But its local spending is very important when we start talking about open territories. The non-20 states that go in that direction.

John Cornriech of Sandler Capital. We on the verge of new duopoly rules in television probably coming up in a month or two, can you give us your thinking about that? Is the tax basis still so low that there's really nothing you can do? Also, I'm just glancing at this. I may be missing something, but under the information and media services section of this fact book, it mentions about everything you're in except broadcasting. Is that a signal?

No, it shouldn't be a signal at all. We'll have to take a very fine reading of that. I think it's got to be in there on that one. But let me go back to your question.

First of all, there is never, never nothing you can do. Regardless of any other kinds of influence. You're never -- ham strung that way. We are committed to our stations and committed to their growth. We are very pleased with the pacing numbers that we're starting to see here. We want to operate them at 40% operating cash flow margins. And they have to be very strong in terms how far they represent the communities they are in. So at this point, in terms of the mix on the business portfolio within the information media side we're very pleased with the performance of those stations.

What we do, you know, down the pike in terms of mix of a portfolio and how we strengthen the portfolio to develop and continue to deliver the consistent returns is down the pike on that point. But we're very committed to those properties. The duopoly rules do give you more flexibility, however. And both ways.

Okay.

At this time, we have a question from our audio audience. Our first question comes from Peter Apper from Goldman Sachs.

Good morning, actually two questions. On the capital spending number of $175m does that include the capitalize the software costs? If not, somewhat that number. Related to that, maybe a preliminary look at what the '04 capital spending would look like? And then an unrelated second question, Terry I'm homing in on the reading first money you can talk about what portion of that you're actually seeing that point and if you have an early sense of what percentage of the reading first money actually is going into instructional materials. Thanks.

Thanks Peter. Bob, you want to take Cap Ex first?

Peter, the capital expenditures of $175m does not include the deferred project capitalized software. That will be approximately $70m to $75m in that general range for 2003. Most likely scaling down a little bit in 2004.

Thank you Do you want to give any indication of follow back to a more normal rate of Cap Ex per quarter?

$175m does include the $50m for the build-out in Canary Wharf. So the normal run rate of $115m or so will most likely be achieved then into 2004. In addition to the $50m for the canary wharf build-out there's a fair amount of spending for backup facilities, disaster recovery with regard to our standard and Poor’s organization, once that's beyond us as well that will be a fair amount of spending that will go away, as well.

Does the software stay at $70m, $75m for '04?

It's a little bit early right my by look at this would be most likely a little lore than that. We do have other projects in addition to the global trans-important project will be scaling down in 2004 from a differ stand point but we have some other pretty significant projects some are in education and some are in financial services. But most likely none will be anywhere near this magnitude. So probably scaling back in the $50m to $60m range would most likely be the case.

Thanks.

Peter, with Reading First, the reading first initiative is actually improving. And when you say it's improving that suggests that there was a problem. There really wasn't a problem. There was a sense of confusion as to what programs certain states already had and did they qualify for some of the Reading First initiatives?

And some of the new programs they were looking at, did they qualify? And under the Reading First initiative? That confusion is going away. That's why I see the Reading First issue is improving. We're actually in the second year. And, again, with the federal government on an end of September fiscal period. We're into that second year and we'll be going into the third year of those fundings and we're very pleased that the $541m that we told you is now, in the state, that the 30 states that have been approved for that.

And only, what we have been -- what we've been told is that only 20% can be held back for administrative purposes. The rest has to go to the local schools and to the districts.

And so we're already seeing those funds and the best case I can give you is the most event one which was right here in New York City where we did very, very well in terms of the everyday math program. So we were very pleased with that part of it but that's all part of some of those early federal fundings. So the funding position there is a good one and I think it's going, again, mitigate, you know any shortfalls that we may see on the state funding issue.

Is your sense, that maybe 50% of the 80% goes to instructional materials?

Yes, I think that it's going to be a lot higher than that. You know, because I'm also putting in there assessment, Peter. And, you know, assessment as well as instructional material. There is a piece, also, that is going to be contained in there for professional development, the teacher training initiative. But the large majority of that is going to be for instructional materials and assessment.

Ok, Great. Thank you.

Our next question comes from Steven Barlow with Prudential Securities. You may ask your question.

Thank you. Good morning. I'm wonder if you could give us a growth rate on professional and international when you were breaking out that whole segment. You just talked about higher ed. I think in the last conference call you talked about revenue growth of 0 to 4% in the education business. It appears you're backing off on that a little bit. We didn't see the 4% number in there just that it would be up.

Really what you talked about in terms of uncertain funding so you backed off a little bit on that side. And then for Bob, just a quick one. You haven't traditionally bought shares back this early in the year. You've always stated as sort after third and fourth quarter event? Any change in philosophy there?

Go ahead, Bob. Share repurchase first.

No change in philosophy in terms of purchases for the overall year, Steve. It just was an opportunistic time to buy earlier this year and we did it.

I think that, you know , as, you know, as we have stated, that in terms of our buy back efforts, that you can count on the fact that we're going to be doing somewhere around 3m to 3.5m shares a year.

If situations warrant it, we thought, even do more on that one. But again, we're going to be very supportive of our price levels on that one. With higher Ed professional and international. We lump them together because of the fact that both higher education, a big component of higher education growth is traveling internationally.

And, therefore, professional and higher Ed both have a lot of combined operations that way. On any given year, because professional and of itself is a smaller portion of the total segment, on that one, you can have some pretty wild swings. You can have modest single digit you know, growth. Or you could have very large double digit growth. It all depends on the revisions of some of the large books like the encyclopedia

Science and Technology or Harrison’s Principles of Internal Medicine or some of those kinds of books so it depends on the year.

This year, will be a little bit more after modest year, building into some bigger revisions for next year. But, again, they travel with the higher education components and we expect good solid growth there.

The other issue on the forecast for K-12 spending for the market now, of being 0 to 4%, that's not what we said. You know, what we have said coming into 2003 is that the market is going to grow 2% to 4%. Now, we have not changed that, at this point.

But given a lot of complexities and the uncertainties that we're seeing, it's very hard to come back and give you, a higher or lower number on that one. I would say that just in terms of, again, one's perspective and outlook, if you hear all the talk on this one, one could get kind of pessimistic and walk off that number.

Until we start to see by June how these state budgets are going to conclude, and my view, as I've said before, on this, Steve, is I'm more optimistic. Again, when you talk about the entire educational spend, you've got all of the construction repair and all the building, you've got the teachers, and the instructional materials, the actual instructional materials is actually a smaller portion of that title component.

And it is -- usually the last thing you want to touch because it is that what (ph.) is going to give you a better chance of being able to get the kind of performance that they be being held accountable to.

So we're optimistic about the instructional material funding. And where, in terms of that spend, some of those cuts could come from. But we need to see in June how some of these 26 states conclude in order to make a better call out. So we're still two to four.

Thank you.

Thank you. Our next question comes from Brian Shipman with UBS Warburg. You may ask your question.

Hi, this is John Christiano in for Brian. Just a couple of questions on the regulatory size. First if you can discuss the PLAT situation, the regulators are investigating the integrity of the indexes there. If you can discuss that, also on the independent research settlement, I guess you haven't budgeted in but have you tried to quantify what size opportunity that would be for S&P which probably has the most successful brand name out there?

Yes, thanks, John. Let me be clear on here. The first question on the regulatory side, could you give me a little more on that?

I'm -- some of the regulators looking in on the PLAT side, the pricing and I guess as part of the investigation in California.

Oh, okay. Yeah, again one of the really wonderful things about our businesses as they become -- as they become more and more important in terms of how they interact in somebody's individual behavior or company behavior, whatever, they become essentially services. And PLATS has become an essentially service.

If you go way back, PLAT is essentially a newsletter and made just a small profit. Today they've expanded that whole component where now you've got a very large revenue base with a very profitable margin. And you're in every aspect from data, analytics to all sorts of components including we produce about 10,000 prices a day in terms of the trading of oils petrochemicals, metal, electricity and so forth.

Now, as it becomes an essentially service and all the exchanges tradeoff of those prices, it obviously in terms of compliance to process and safeguarding the integrity of that process becomes very, very important. And there have been issues where traders have tried to manipulate prices in the past and there was case in California that came up and I was very pleased in the California suit that was sort of you know, everybody was brought in, us included, the judge threw us out, on first amendment protection.

But again, it highlighted the importance that PLATS has taken on within that energy market. Again, just like the ratings process, less like CTB, the testing process, educationally, we have very strong compliance processes in place to safeguard any kind of intrusion in those businesses. So we feel very good about the PLAT situation.

In terms of independent equity research, again, the issue as we've said before is really developing the business model. With some 80 analysts and being able to have in-depth detailed recommendations on 1400 companies, and the way they have proven to work with the five stars out performing the four stars and so forth, we feel very good about our capability and our ability to be in this market place but it has not been a big revenue generator.

Unlike the brokerage houses, we don't have the business model to be able to generate those kinds of fees. Now that, the push and the need for more independent equity research is there, we believe that this is a very nice opportunity for us, to be able to further establish and further penetrate our position here as the largest independent equity research house.

So we feel very good and the brand, I think, is very solid in terms of its reputational value that way. And so we'll see how it unfolds. But, again, as we were saying, we're not -- it's too earlier to tell in terms of a business model what the aggregate opportunity can be. We know what the settlement piece is. We're not doing it just for settlement money. We've been in it for sometime and we're looking for multiple ways to expand it. It's hard to put an addressable market size to it, on this within. But, again, not having anything budgeted for it, you know, we're looking at some upside.

Thank you.

Thank you. Our next question comes from Carl Choi from Merrill Lynch.

Hi good morning couple of questions with regards to the higher education segment given the fact industry start off the year a slowly down by 5% could you tell us what signs you are seeing out there to give you confidence that you think the industry will be up, say , 6% to 7% for the year? Second question, is the gateway to quantify how much the impact of the -- from the closing of the Orlando coloring book activities?

Okay, I'll take the first one Bob. You get land-all, which we wrote off at the end of last year. On the higher education side t higher education side, again, remember, it sells by title. Which is very different than the K-12 market which sells by program.

It takes on the K-12 side, it takes longer to get these programs developed, supported, and so forth. On the title side you have both a very active front list and you have an active back list. We are very fortunate to have what we consider Bibles in all of our core disciplines. Inn chemistry, very strong in economic and engineers, strong in the medical fields and the like.

Therefore we benefit on a more consistent basis with both a front list and a back list. That are both very active and so you know, you're getting, you know, two shots at it. The third part, on this, is the international. And international for us, especially because of the fact that through the acquisitions that we made and most notably at times, mirrors education operations they were very, very low in terms of their penetration outside the United States, with some 23 distribution centers around the world, we're able to adapt a lot of that material very quickly and take advantage of it that way.

So we have a very consistent steady return. It's given us an ability to grow at a faster rate than the market. And we fully expect this to be the third year in a row of being able to do that. So we think that 6 to 7 is a good number for the market. And we expect to beat it.

With regard to land-all, it was about $1.3m in revenue for the first quarter and range it was about $3.5m for $4m for the year last year. It made virtually no profits. We essentially sold off the remaining stock, remainder some of the stock. There was really no loss or no write off to speak of but it was an unprofitable business line that we just simply wound down. And, again, that was as you well know was part of the Tribune acquisition.

Thank you.

Our next question comes from Kevin Gruneich from Bear Stearns. You may ask your question.

Thank you I'd like to ask a question on global transportation and if I could ask a follow-up on reading first. First on GDP, the $180m, it wasn't clear what was capital spending and what was going to be expense.

I was wondering if you could take a look at that, that's already occurred in the past years and then expectations for '03 and '04? Then, also, you mentioned I think that in the K that $21.5m was expensed last year. What was the Q1 expense comparison specifically for GTD?

Okay, Kevin. $180m in total that we plan to spend, roughly $91m will be deferred ton balance sheet. There will be roughly $10m or so fore capital -- for capital related items. So the balance of that will be expense. In the first quarter there was -- actually, there was no deferred costs in the first quarter, all the spending, which was $7.6m was expensed.

How does that compare with last year's first quarter?

Last year we had deferred off the top of my head I'm not sure. It was a higher amount of money last year. What we were doing -- as we were reassessing the project and we we're looking at these additional features we took a pause and as a result of that the work that we were doing was not enhancing the software, so essentially we expensed that at that additional cost that was during the first quarter. Now that we have fully outlined the new features that I mentioned earlier, that we will begin the deferral process. We deferred more as we look out for the balance of the year, we'll be, let me just give that you for the full year what we estimate. We estimate deferring for the full year $14m, for GDP alone of the roughly $70m or so and on the expense side it's about $20m for this year, for 2003. Next year the deferral level drops down to maybe between $10m and $15m or so. And the expense level also drops down to roughly that same range.

Okay. On reading first, well, you know you've got to be excited about getting federal funds. I'm curious as to, you know, your expectation or the legislation called for $900m in the first year, September 20 and $1b this year , September 2003. The fact that only $541m has gotten to the states, could you talk about that? What, you know, what are the states doing wrong? And now you're talking about some of that $541m getting deferred into '04. I’d just kind of like to get your gauge on that and your excitement regarding the program going forward?

Thanks, Kevin. Well, as I was saying, I'm optimistic with these fundings and I think that the improving situation now gives us good hope that it will mitigate any short-term effect in K-12 funding. Actually, the $541m is pretty good. At this point, with 30 states.

More will be coming out over the next couple months. And, again, being on a fiscal end of September there's still plenty of time in this fiscal year to complete that or to get very close. The issue really, Kevin, is at the state level in terms of understanding what is considered acceptable for some of those programs. How they can alleviate some of their temporary own local funding to be able to take advantage of some of the federal funding. On that, that's why the size of the pie, I think, is a little bit bigger.

But secondly, they are also in a situation of having to be able to be accountable to federal standards. So if you take federal money, and you have got to live up to federal standards. Not all states in terms of their own accountability measures are at the level of the federal accountability standards. So you've got this notion, I want that money. I want to take it on. But I might have a problem in terms of being able to deliver on those federal standards. So there's a lot of negotiating that's going on in terms of how you make your case to the federal government for access to those funds and there's an approval process of where you

are and what you will do. So I think it's just taking a little bit more time. But there's no question that the funding is there. And we're encouraged by the 30 states and the $541m. And we expect to see a good deal more before this fiscal year is over. Again, I think the best part about that is that even though we don't see an awful lot of pressure on instructional materials in the aggregate, I think that these funds are going to be able to make the pie just a little bit bigger. So that's where the optimism comes from.

If I could just add to my comments for Kevin with regard to GTP. Last year, Kevin, in first quarter capitalized costs for technology projects was $21.9m, which most of that was GTP. For the year, it was $55.5m of which GTP amounted to in the range of about $45m.

Thank you.

Thank, Kevin.

Thank you, our next question comes from Douglas Arthur with Morgan Stanley. you may ask your question.

Hi It’s Lisa Monaco for Doug. If you could just talk to the margin performances at financial service and knowing what you know now that if the margin can expand over 37% or so? Thank you.

Thank you, Lisa. Let's see. The guidance that we gave is coming into this year was that our margin levels in Financial Services would be about the same as last year. Which got us into the 34%, 36% range. We're a little bit higher than that. And we see, you know, we see terrific demand. I don't think, you know, at this point, you know, would make, you know, a change in that guidance.

But I would also couple with that that we are seeing a very strong new issue dollar demand issuance market. And we think that with the refinancing market extending even longer, with more participation now in terms of the structured finance market, most notably in Europe and in Asia , Japan is doing, you know, is doing extremely well in this area. We're quite encouraged.

I'm also encouraged about the high yield market. This was one that we hadn't expected at this point but it's starting to pick up quite nicely. You're actually seeing some very good activity in Mexico and in Brazil. Which wasn't expected. I think some of the calm associated with some of the thinking of potential political instability , there has (inaudible) certain investors and therefore has opened that up a little bit.

So overall, we see very strong demand on that side and, therefore, for the credit rating side we fully expect to have a very good year. Double digit top and bottom.

Could you just talk a little bit about L-high? Provide some color in the quarter, the sales from your older addictions of the back list?

Well again, on the K-12 side we focus on programs by specific disciplines. In this year it is not as a robust adoption market as we have had in the past. We're looking more to '04 and '05 for a pick-up in larger funding on that one. But social studies, math, you know, certainly reading, are all going to be very important and, you know, components to this year.

Another one that we need to watch very carefully on the K-12 is this move toward standardized instruction as it relates towards urban education. Most of the things with the education bill, the No Child Left Behind, as well as a lot of the state authorities all focused on where the real problem is and that's in the urban education.

And so number one, the focus is on getting to the point where you have standardized instruction so that a youngster moving from one school to another is not going to be disadvantaged because of the fact that there's different materials at this school versus this school and it's a different type of teaching as phonics based or whole language based or whatever.

So there's more uniformity. By the way that, is what New York City in testimonies of their redesign, that is what Joel Klein has done, is create add performance culture with more standardized instruction. That's what we're seeing cropping up all over. That's an area to watch very carefully.

The second one there is early childhood learning. If you can touch a child the right way up front, so you don't have to get into a lot of remedial and intervention and all of those kind of things, you can get the child up front reading early on.

Then the whole academic diet opens up. So you'll see a lot of focus on early childhood learning and, as you know. There is some 11m three to five year olds in this country and only 3 of them attend a pre-K program. At some point we're going to see pre-K become the new grade in our whole educational experience. So early childhood learning and within the urban education market. Does that help?

Yes, thank you.

Thanks.

Thank you. Our next question comes from Brandon Dobell from Credit Suisse First Boston. You may ask your question.

Hi good morning. A couple of quick ones, Could you give us a little color on the mix at business week in terms of advertising strengths and weaknesses in different categories. That would be helpful.

Secondly, if you could give us a little more color on your margin expectations for education for '03? Then longer term, do you think anything structurally has changed that would change your longer-term expectation?.

Terrific. Again with Business Week, you're going to be looking at a couple of areas. You're going to be looking at financial. You're going to be looking at auto. You're going to look at high tech. And what we see with a recovery is a general rush. You know, back in all areas. And it's usually a few large players. And then it starts to build from there.

What you need to see is the introduction, again, of large product specific advertising. Once you start seeing that, then about three months later you start getting into all the corporate image advertising that supports that product in production.

So if we start to see the capital spending, starting to come back. We think we're going to see by the end of the year a little bit more help in the high tech area, financial ought to be coming back in, industrial materials as well. And, therefore, you're going to start to see the recovery that is taking place played out in terms of those advertising pages.

So it's really going to be the high tech t financial t industrial materials and the auto that we're going to be foe cushion on there. With respect to margins, for the whole educational segment, we're looking for a 15% margin in the educational segment overall. That's skewed, again, it's a little bit lower in the elementary areas and it's a lot higher in the higher education area. Last year I think we had a margin of, what, 26.7 in the higher education. And it was pretty good.

It was pretty good, yes.

It was pretty good, There we go. And so it mixed and it will go up and down. Obviously dependent upon the strength, front list, back list, all of those kind of things.

Okay. Thanks a lot.

Thank you. Our next question comes from Patrick Wellington from Smith Barney. You may ask your questions. Mr. Wellington, you may ask your question.

Probably got his answer with one of you guys.

Mr. Wellington, your line is open to ask your question, sir. Thank you. We'll move on to our next question from Charles Peacock.

Thank you, Good afternoon. I had three questions. First I want to know if you could say what assumption you had made about text spending books 2% to 4% for the school education overall?

The second question was whether the 2% to 4% includes testing in this prognosis, what sort of growth you'd expect for that this year?

And, thirdly, in supplemental, what rate of growth or decline in revenues did you have in that part of the business? What is your expectation for the year?

Okay. All right. I don't want to get my CFO unhappy with me anymore here so I better be good here. Texas spending, we don't know. Literally, it's a very contentious state legislature battle going on right now. We know that they're going to come to a conclusion by June 2nd in that one. My own guess and it is that, is that social studies in Texas is going to get funded.

And we have a very, very strong capability here. We expect to do well. And already in terms of the interest levels that we have seen we've seen some very high levels of interest in the secondary market.

But we'll just have to see exactly what they are going to come forward with. Again, one of the issues there, Charles, is on the ordering. The later they go, in (inaudible) the second quarter, in terms of making their decision of what they are going to do, you know, the more difficult it is from a timing standpoint to fill those orders in June. We'll have to watch that timing issue. on that one. As far as testing is concerned. It is a, again, it is a, you know, state issue here. And some of it obviously is mandated, and therefore will get funded.

In terms of taking on a different initiative at this point, it is all part of the instructional material mix. And that's why, you know, again, we feel quite good about the mandates for not only the instructional materials in the testing, but we're very focused on those two components, the other of that professional development coming out of reading first. So, we'll have to see on there, you know that we have been performing very well there; and our expectations on the full year basis would be very similar to past years.

Supplementary we don't break out those components but I would focus, again, on the standardized instruction with SRA and Open Court, Everyday Math, those components that are focused at the direct instruction market at the urban education area and those are a sweet spot for us and we're doing very well in those.

Okay. Thank you.

Thank you, gentlemen, at this time that was our final question for audio portion.

Okay. Well thank you all very much. And we're off and running. Thanks.

Thank you; this concludes this morning's call. On behalf of McGraw-Hill companies we thank you for participating and wish you a good day. You may disconnect at this time.