標普全球 (SPGI) 2003 Q3 法說會逐字稿

Good morning and welcome to the McGraw-Hill Companies' third quarter 2003 earnings call. At this time, I would like to inform you 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. To enhance the call for today's telephone participants, McGraw-Hill has made the presenter slides available on the Internet. To do that, go to http://www.mymeetings.com/nc/join. I'll repeat the url once more for those who would like to view the presenter slides online, it is http://www.mymeetings.com/nc/join. You will be prompted to enter your name. Then the conference meeting number is p as in Paul, g as good, 7498177. The password is McGraw-Hill, all caps, with a space between McGraw and Hill. And the event type is conference.

The call is also being simultaneously webcast from McGraw Hill's investor relations web site and will be available for replay about two hours after this 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 zero and I will assist you momentarily. I will now turn the conference over to Donald Rubin, Senior Vice President Investor Relations of the McGraw-Hill Companies. Sir you may begin.

Thank you. And good morning and thank you everyone both here and abroad for joining us at the McGraw-Hill headquarters as well as on the phone and the web for this morning's announcement of McGraw-Hill Companies third quarter 2003 earnings. I'm Donald Rubin, Senior Vice President Investor Relations for the McGraw-Hill Companies. With me here today Harold McGraw the third, Chairman, President and CEO, and Robert Bahash, Executive Vice President and Chief Financial Officer of the corporation.

This morning we issued a news release with our third quarter 2003 results. We trust you all have 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/investor underscore relations. That's 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 and descriptions of future events. Any such statements are based on current expectations and current economic conditions, and are subject to risk and uncertainty 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're aware that we do have some media representatives with us today on the call.

However, this call is for investors and we would request that questions from the media be directed to Steve Weiss 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 the meeting to questions and answers. It's now my pleasure to introduce the Chairman, President and CEO of McGraw-Hill Companies, Terry McGraw.

Okay. Thank you very much, Don and good morning, everyone and thank you for being here and if you are listening in we welcome you as well. I'm going to talk about our third quarter. And I'm going to be talking about our operations and then I will give you a little bit on the outlook for the remainder of the year. And then Bob Bahash, our Chief Financial Officer will be talking about some of the key aspects of our financial performance. And then we'll go to your questions and go in any direction you would like to go. Okay.

Earlier this morning we reported third quarter results. Earnings per share from continuing operations were up 7.1%, to $1.51. Income from continuing operations increased 5.7%, and revenue grew by 4%. I'll take this opportunity to once again repeat the guidance that we have been providing all year long. Even in an environment where everything is not operating at optimal levels we fully expect to achieve the earnings per share growth of 7 to 9% for 2003, and, again that includes a 5 cents non-cash, non-operating charge for pension accounting assumptions. We continue to be encouraged by the improvement in the economy.

When the numbers for the third quarter come out a week from Friday, our economists expect GDP growth to be at 5.5%. We anticipate fourth quarter GDP growth to be 4.6% and for 2004, we're now forecasting GDP growth to be 4.4%, each of these numbers are higher than the projections we gave you the last time. Productivity gains in the United States have been so strong that unemployment rates have not fallen, but the jobs will be created and so we expect improvement in the employment picture as well, a number probably below 6% as we get into next year. After a setback in the second quarter, largely because of the war in Iraq, there has been a pickup in capital spending for equipment.

Again, we're looking at about a 9% run rate at this point, and we'll be looking for a similar 9% run rate as we get into next year. Corporate profits are continuing to improve. We're looking for roughly 17% operating income profits for this year and about 13% next year. That would equate to about 53.40 on the earnings per share on the S&P 500 and $60 a share on the S&P 500 for '04. In general, states have their budgets under control.

We expect little, if any increase in state spending this year and next year, but states have tried to protect their elementary and high school educational spending. In July,we reported that the national conference of state legislators projected a 1.9% increase in K-12 budgets for the fiscal year that started on July 1st and ends next June and that was based on available budget information from 38 states. We subsequently completed our own comprehensive survey of state education budget and based on information from 49 states, we now see an increase of 2.5% in state K-12 budgets for the current fiscal year. Okay.

With that as a background, let's take a look at our three operating segments and the performance of those and let's begin with education. From McGraw-Hill education for the third quarter revenue was up 1%, operating profit was off 2%. Revenue at our school education group grew modestly, we were up a half of 1% for the third quarter. Several factors heavily influenced our third quarter results. This is obviously not a one size fits all market and in such key disciplines as reading and math, our alternative basil are once again proving their value.

Open Court, our research based reading program continues to win new adherence and is doing particularly well this year in districts eligible for Reading First Funds. Those are the funds coming out of No Child Left Behind legislation. That potential greatly expands next year as more funding reaches the market and I will come back to that in a little bit. Everyday Math was a part of the record. It was a record open territory adoption that we won this year in New York City and has done well in other urban centers including Philadelphia.

This innovative program is another reason why we like our prospects in next year's math adoptions. Our K-12 science programs performed well this year in the open territories and in the adoption states, in particular Tennessee, South Carolina, and Louisiana. Social studies was more of a mixed picture for us. We took 7% of the elementary school adoption in Texas, clearly had an effect on our performance but we also captured 38% of the middle and the high school social studies adoption where more dollars were at stake. As a result, we still won 28% of the Texas social studies adoption K-12.

We had much better results with the elementary social studies program in other adoption states, notably Indiana and North Carolina. Our middle and high school programs were strong in all of the adoption states. We saw a decline in the sales of children's supplemental education materials, particularly to the educational dealers. It was a good quarter for testing. Custom contract businesses continues to grow. California, New York State, Kentucky, Connecticut, Colorado, all had programs, all contributed to the performance.

But, remember, the fourth quarter is seasonally more important for testing than the third quarter. We've seen some cancellations and delayed ordering brought about by budget uncertainties and some shortfalls in state and local funding. Deferrals became even more evident in the open territories as we worked our way through the third quarter which is the peak ordering period for the school market. Our evidence on cancellations and deferrals is largely anecdotal at this point and so it's difficult to estimate the impact on the market this year. We have also seen a pickup this year in reordering from our backlist, programs sold in previous years.

Schools want to make sure that students have textbooks so they bought replacement for older programs that they are currently using instead of purchasing some brand new ones. The single largest postponement this year occurred in Kentucky, which is an adoption state. Kentucky delayed its K-8 math adoption, which is estimated to be worth about $13.4 million to the market this year. Still, some math programs were brought this year in Kentucky with local funds, at both the elementary and at the secondary levels.

Even without Kentucky we still expect the new state adoption market this year to hit $750 million. That will be a 9% increase over last year's level, and we now expect growth in the open territories to be essentially flat year-over-year. Through eight months now, eight months total industry sales are up 2.4% and that according to the Association of American Publishers. But based on the latest estimates we expect that total market will finish 2003 with a more modest increase. One final point about the deferrals and the postponed adoption, this year's deferrals could still run into next year's orders and there's a possibility that Kentucky could reinstate the math adoption for next year. Earlier I mentioned Reading First funding from the No Child Left Behind legislation. $900 million was available for the first year of the program.

The department of education stated that in making the first year grants to states in June of 2002, that that would be completed and that part of the program earlier this month when South Dakota and Rhode Island were approved. It took more than a year to award these funds to all 50 states, a territory, the District of Columbia and the Bureau of Indian affairs, But they now have the first year and some of the $993.3 million available for the second year of this six-year program. It's not clear how much of the first year money actually found its way through sub-grants to a local education authorities this year. We believe that much of the first year funds and virtually all of the second year funds will start to reach the market in 2004. A very important factor for next year. Take New York State as an example.

New York State received $129 million as an award at the end of September, which includes funds for the first year of the program and 80% of the second year's award. The state says it plans to send the bulk of the funds to schools in eligible districts by next February. Based on our experience this year, we believe that state and local authorities would retain about 24% of the total funds for their own use, administration program development, training, and other activities. Of the remaining funds in the program, we now expect 20 to 30% to be spent on basil and supplemental instruction materials, 20 to 25% for assessment and the rest on professional development. We have products and services in all three areas.

For example we're the sole provider of professional training for Reading First in the state of Wisconsin. We clearly have the instructional and testing products to help schools meet their needs. We will continue to monitor, obviously the situation very carefully since we believe the potential for Reading First materials and assessments will greatly expand in 2004. Let's shift over to the Higher Education, Professional and International Group. Here revenue for the group in the third quarter grew 1.8%, on the strength of our college and university business here and abroad. We continue to outperform the market.

According to the latest available American Association of Publishers statistics the college and the university market through August, eight months now, was up 3/10th of one percent. We have later reports indicating much better results for the industry in September, and through the end of the year, and consequentially we expect the market's overall performance to strengthen through year-end, although probably not at the levels forecasted earlier this year. Clearly, it is a moving picture. One we'll obviously continue to watch and keep before us. Right now, information about the college market is still sketchy and it will take more time to get more concrete data.

We do know that one of the major college book store chains deliberately ordered lightly this season to reduce its returns. That's not all bad, because we're currently seeing some of the reordering activity and if more accurate ordering also leads to reduced returns, late this year that would be a plus for us as well. New enrollment figures for the fall semester so important to the college market, obviously, are not available at this time.

In view of the market's slower than expected growth, it's possible that enrollments did not increase this fall as expected but it may be more likely that the recent budget pressure and Higher Education did lead to a reduction in course enrollments since students may have absorbed higher tuition cost by taking fewer courses. Since tuition is based on the number of credits that you take each semester, it is possible that enrollments remain strong, even if students signed up for fewer courses. We also know that colleges and universities have cut back by offering fewer courses in less popular discipline. That also reduced student options and obviously course enrollment affect the purchase of materials.

Our results for the third quarter and through the nine months are are certainly positive. We still expect to outperform the domestic college and university market this year while improving our profitability. We listed our best sellers this year in the earnings release this morning so I won't repeat them now but I will point out that we had the best results in our imprints for humanities, social sciences and language, and in science, engineering, and math. Our growing use of technology in the college market continues to create sales. The latest development is our new classroom response system. It's based on a wireless remote response pad used by every student in the classroom. Instructors recognize that this hand held device fosters active learning because each student is on the spot in the classroom to respond.

They press a button on the pad to answer the instructor's question and the instructor see's each student's instant response on a PC at the front of the room. That's the realtime feedback and it is the end of the sort of anonymous factor in the classroom. Not paying attention or avoiding eye contact I guess won't work. If you don't respond, the instructor will be able to identify you because of your spot on the PC screen is blank. We licensed this system from E-Instruction and started using it with our science group last spring. We rolled it out in August. The student pays for the access code and it's wrapped into the text for each course. And as I said the response from the market has been very high.

We've been very aggressive in developing web support for instructors. Our web asset support all of our major courses. Web enabled products, such as ALEX, which is our artificial intelligence based product for assessment and diagnostics in mathematics, statistics, business and accounting. Power Web, which is an online resource of news, current content and journal articles that is created by subject matter experts and is regularly updated. Online learning centers with book specific digital content, these are all power full tools for instructors delivering online materials. All reports indicate that the online enrollments are showing strong growth, albeit from a low base.

It is coming from traditional students seeking a different delivery and from new enrollments and we welcome, obviously this development. As we look ahead, it's quite clear that the E in education is going to become more electronic. This development will add to our competitive advantage as we improve the value proposition for our customers in this market. In the professional area, we've seen some pickup at retail. We've seen some strength in our back list and William O'Neill's new book, The Successful Investor, has hit The Wall Street Journal's best seller list. Sill the worldwide slump in computer titles and some softness in scientific, medical and technical titles, held back growth in this area.

And therefore, summing up for the entire education segment, continued improvement in Higher Education, both here and abroad. A broad and diverse product line kept us moving ahead in the Elhi market and our alternative basil and supplemental areas continue to benefit from the Reading First funding which will have an even greater impact on the market next year. With, that let's go to financial services. Revenue for the third quarter increased 15.1%, but if you exclude MMS International which was divested in September of 2002, revenue actually grew faster. MMS reduced operating revenue by 2 percentage points.

Operating profits grew by 33.6%. And it was another obviously outstanding quarter in ratings, which was the key to the S&P record. It was also the strongest quarter for new issue dollar volumes so far this year in the U.S. bond market. The first quarter was up 11.8%. The second quarter was up 22.4%. And the third quarter new issue dollar volume was up 27.7% here in the U.S.

The growth of the new issue dollar volume in Europe was also robust. The first quarter was up 24.8%, The second quarter was up 48% and the third quarter was up an astounding 107.4%. And these figures come to us from Securities Data and Harrison Scott Publications. Of course, there's much more to our results than new issue volume and I can't make that point too strongly or I can make it too often. We continue to grow because of the diversity of our product mix, the successful effort to reduce our dependency on U.S. new issue volume, a strong international presence, and the rapid growth of non-traditional products and services which aren't tied to new issuance.

Let's take a little closer look at how this product mix worked during the third quarter. Non-traditional services now account for about 20% of our ratings revenues. And in the third quarter, bank loan ratings, counterparty credit ratings and global infrastructure ratings all grew faster than our traditional ratings products. Ratings overseas are also growing rapidly and now account for about one-third of our ratings revenues. Structured finance is also producing very solid gains worldwide. Residential mortgage backed issuance was strong in the United States and Europe. The structured market has also enjoyed remarkable growth in Europe and in Japan.

In Europe, structured finance is driven by hybrids, these are bonds and loans combined with securitization and collateralized debt obligations, CDOs. Europe is also the leading market for credit derivatives. The pipeline for the fourth quarter continues to look very promising. We obviously monitor this very closely. In the residential mortgage-backed security market, there's a lag that exists between a rise in interest rates and a reduction in mortgage originations. Several months can elapse between the time when a mortgage applicants lock in their rates and when these mortgages actually close.

Refinancings have a negligible impact on the commercial mortgage backed securities issuance since most of the commercial mortgage backed security loans are refinanced at maturity and, of course, commercial mortgage backed security issuance was up solidly in the third quarter. Asset-backed securities benefiting from lower interest rates and the consumer's higher debt capacity continue to show strength. Credit card refinancing and student loans drive this market. Student loans incidentally are the fastest growing component of this market; although, they represent just under 20% of issuance for the first nine months of this year.

The corporate market, one that we've been watching very carefully is also growing at a very rapid rate and its experiencing a continued demand for high yield instruments. New issue volume for the speculative grade bonds grew by more than 600% in the third quarter. That represented 28% of the corporate new issue dollar volume for the period. We expect interest rates to remain attractive to investors who are seeking higher yields, so volume in this area should continue to be robust. Only the public financing sector issuance declined in the third quarter in the U.S. market after a very strong July. This market tailed off in August and September. Weakness in tax receipts and funding needs, and refinancing opportunities will continue to drive issuance but this was also a strong market last year in the fourth quarter.

So while volume will be very healthy, I think the year to year comparisons in the public finance area will be a little bit more difficult. We continue to make progress in structuring our independent equity research agreements with many of the leading firms on Wall Street, and as part of the global research settlement. All ten firms have now selected their independent consultant, the response to Standard &Poor's proposal to become an anchor provider of equity research services has been positive, and as we enter the next stage of negotiations we believe the outlook for S&P is quite favorable. We also recently signed a sub-advisory contract with Samsung Securities in Korea and we did this to create a U.S. portfolio based on our star selections for Korean investors. We will manage it on a daily basis against a defined bench mark.

We are not responsible for the trading or the administration and Samsung is responsible for executing those trades. As many of you know, S&P's five star selections have outperformed the S&P 500 since 1986. Through September 30th our five star selections have produced an average annual increase of 15.8%, versus 8.8% for the S&P 500. For this year, through October 17th, our five star selections are up 24.9% versus 18.1% for the S&P 500. In September, the S&P hedge fund index was added to the Merrill Lynch hedge access platform.

Hedge fund, up funds and now for first time the S&P hedge fund index products will be sold through this channel. We think this step could increase the growth in assets based on the S&P hedge fund index and we continue to enjoy solid growth in assets under management in Exchange-Traded Funds that are based on the S&P indexes, and at the end of September assets under management hit $66.6 billion, a 35.6% increase over the same period last year. Okay, in wrapping up our review of the financial services area, I do want to comment on the response to the SEC's concept release concerning the rating agency. The SEC, as we know, received over 40 responses to its concept release.

Most were supportive of the roles and ratings in the U.S. capital market and believe that the nationally recognized statistical rating organization, or the NRSRO designation, should be retained as we believe it should. Some recommended improvements in the designation process. We now expect the SEC to issue it's summary of public responses to the concept release probably late this year, towards the end. But any further steps by the SEC probably will not occur until sometime well into next year. Okay, to sum up for the financial services segment, the diversification strategy helped produce another outstanding quarter for us.

We're on our way to achieving the double digit top and double digit bottom line from operations forecasted for this segment in 2003, as we gave in guidance since the beginning of the year, and the operating margin is now likely to end the year over the 35% baseline target that we originally had suggested. Okay, let's turn to the information and Media Services segment. Revenues here declined 3.5%, operating profit was off 2.4%. Clearly we have not relaxed our tight grip on expense controls, nor will we until we see significant signs of revenue pickup. In a generally soft picture for advertising in the third quarter we were encouraged by the trends at BusinessWeek.

After Labor Day, advertising started to pick up and BusinessWeek had a 3.2% gain for September. The magazine is positioned for better days ahead. The all important factor that we look at very carefully here, circulation, is at a record high. We're very encouraged by that. And BusinessWeek is running very well in the important syndicated research studies and winning nicely. We've also taken important steps to give the publication a more contemporary look. The new design, the redesign, the first major change that we have made since 1983, was introduced with the October 6th issue. The design utilizes more white space on its pages, larger headlines, new type face and features more photography.

Bookings at BusinessWeek have improved in 11 of the last 14 months, so we remain optimistic about the fourth quarter prospects but also about the 2004 environment that we will soon be entering. In broadcasting our California stations did benefit from the recent campaign to recall the governor, but not enough to offset the political advertising which we had in 2002, which was, obviously, an election year. We saw some pickup in consumer and service advertising but retail, automotive and leisure time categories remain mixed. As a result, broadcasting revenue declined 7.5% in the third quarter. In the construction market, the shutdown of Dodge Scan last year and the weakness in commercial construction offset improved sales to the building product manufacturers but tight cost controls here also contributed to an improvement in margins. In energy, strength in the oil markets were offset by some weakness in the power sector. Advertising is still soft in aviation and healthcare.

And as a result, revenue at our business-to-business group declined 2.8% for the third quarter. So summing up for the information and Media Services, advertising was soft in the third quarter but we began to see the signs of improvement that we have been looking for, albeit a little bit slow. 2002 was an election year so broadcasting faced difficult comparisons in the fourth quarter year-over-year, in the third and comparisons for the fourth quarter this year and we will continue to aggressively control costs to protect that operating margin. And we'll only start to release some of that investment when we start to see the revenues picking up.

That wraps up the report for the three operating segments and to sum up for the corporation overall, the overall market environment is improving. Continued strength in financial services, federal funding will bolster the education market in the fourth quarter and importantly, as we get into 2004, and the advertising environment is clearly picking up and we're on track to deliver the guidance that we provided, the 7 to 9% growth in earnings per share this year and, again that includes the 5 cent non-cash, non-operating charge in the pension/accounting assumption. So that's the picture for the third quarter and a little bit of the outlook. Let's go to Bob Bahash, and we'll do a little bit more on the performance side and then we'll take your questions.

Okay. Thanks, Terry. We continue to maintain a very strong financial position. So let's start this morning by reviewing our progress in reducing our overall debt levels. Total debt at the end of the third quarter was $215 million, that's 575 million lower than debt at the end of September last year, and $363 million lower than 2002 year-end debt. Our cash balance, now the balance of cash as compared to the first nine months of 2002, actually increased by $91 million, or 84%. Of the total third quarter cash balance of $199 million, 93 million was held in short-term money market funds in the U.S.

The remainder is held primarily outside of the U.S., part of which will be used to pay for our new London facility at Canary Wharf. Therefore, if you look at our debt net of the $99 million in domestic cash surplus, it is below $125 million. We plan to use this surplus cash to pay down commercial paper in the fourth quarter as it matures. We expect debt at the end of the fourth quarter to decline slightly from the current level, continuing strong cash inflows will be partly offset by our normal fourth quarter tax payment which is normally the largest of the year and more share buybacks. We have kept our debt and commercial paper to take advantage of low interest rates. Our average interest rate on commercial paper borrowings for the first three quarters of 2003 is 1.2% and this is a decrease from the 1.9% rate for the same period in 2002. As a result, interest expense decreased to $2 million from $6 million in the third quarter of 2002, and year-to-date, interest expense of 7.4 million, versus almost $20 million reported last year.

The decreases in 2003 reflect the reduced average debt outstanding, and the reduction in the average interest rate as compared to the same period of 2002. Corporate expenses increased 1.5 million or 5.5% for the quarter. And year-to-date the increase is 5.2 million or 8.1%. The increase is largely a result of the occupancy cost increases that we had mentioned at last second quarter review. As we discussed last quarter our blended tax rate for 2003, from an operating perspective is 37%. And you should anticipate this rate for the remainder of the year. The company's aggressive approach for controlling costs, which Terry had mentioned earlier, is an important aspect of our financial strength. Keeping a tight grip on costs remain a focus for us, even as we continue to invest in technology.

Total pretax expenses when we exclude corporate expense and interest expense grew in the third quarter by 2.3%, as compared to the same quarter last year. And year-to-date expenses have increased only 1.3% versus 2002. Lower manufacturer costs continue to play a role in our overall cost containment effort. Last year, combined printing, paper and contribution prices for product-related manufacturing decreased by approximately 3.6% or $17.4 million. We're making good progress in 2003 as we continue to negotiate successfully with our suppliers. Some recent consolidation efforts in education also are leading to additional cost savings.

On July 1 of 2003 we combined SRA McGraw-Hill, Write Group McGraw-Hill and McGraw-Hill Contemporary into the Learning Group to increase efficiencies and better leverage growth opportunities within the growing alternative basil and supplemental markets. Now as you know the Write Group was part of the tribune acquisition. It operated as a stand alone unit in the State of Washington, as one of the last steps in consolidating the Tribune acquisition we closed down the Write Group operations in Washington and moved them to Chicago to operate with our learning group units. We reorganized our computing and post secondary product lines in the end of 2002. The consolidation of these computing units into one operation allows us to create a more coordinated publishing plan which is focused on our global computer opportunities. At the end of 2002, we reorganized Dushkin, the publisher of college-level supplemental text and digital products to focus on web content service delivery.

We combined two editorial groups into one and reduced the production department. This year we announced the combination of the Dushkin operations with our custom publishing business located in Dubuque, Iowa. The prepublication costs for the third quarter were $50.6 million, which is down 17 million from last year. For the first nine months of 2003, spending totaled $140 million which is $42 million less than spending for the same period of 2002. We now expect to spend about $225 million, which is down from the earlier forecast of $260 million. There are several reasons for the lower forecast for 2003.

With the continuing softness in computer and technology book sales worldwide, we're cutting back on these programs. Across the education segment, technologies are eliminating costly production steps through the standardization of file formats and digital transference of data directly from computer to plate. And of course the reduced costs also reflect that 2004 will be a lower new adoption year than we have experienced in recent years. We'll be carefully ramping up our costs, of course for a much bigger 2005 and 2006 adoption program, so expect 2004 prepublication costs to get back to a much more normal run rate. Now let's look at capital expenditures for the third quarter. There are three ingredients in our capital expenditures, purchase of property and equipment, prepublication expenses, which I just spoke about, and additions to technology projects.

So let's just start with the cap ex. Cap ex, that's what we spend on property and equipment, came in at 21.5 million for the quarter, 13 million higher than the same period in 2002. Our expenditures for year-to-date total $62 million which is about $27 million higher than the first nine months of the prior year. Spending in this category will be higher for the remainder of the year as we prepare to occupy our new building in London's Canary Wharf. We now estimate capital expenditures will reach $160 million for the year, down from an earlier estimate of $175 million. At Canary Wharf the construction is nearly completed on 12-story facility. We're planning to move approximately 650 employees into the leased facility during the first quarter of 2004.

Employees will be moving from eight locations throughout London into five floors plus the lower level in the new facility. Our current capital estimate for the project, in 2003 is $50 to $55 million, with the majority spent just by year end. Next is additions to technology projects. For the third quarter we spent $7.2 million which is $6.5 million less than the same period last year. The full-year estimate for deferred spending on additions to technology projects is still 60 to 65 million, and could run possibly slightly below that. Of course the major project here is GTP.

In the third quarter total spending for GTP was almost $9 million, close to what we spent in the same period in 2002. $4.8 million of that spending has been expensed and the balance has either been deferred or is part of the capital equipment program for that project. For the first nine months of 2003, total GTP expenditures were 30.2 million, down 13.9 million compared with the same period last year. $20 million of the nine-month total is expense, $4.3 million deferred and the balance being capital equipment specific for the project. The full-year total expenditure for GTP is about $38 million, $25 million to be expensed and the balance being deferred or, again part of the capital equipment for the project.

The GTP system will provide all of the McGraw-Hill education with enhanced customer service, finance, production, inventory and data management functions. The project is on track to implement its second phase, targeting a spring 2004 launch of Oracle 11i and that's our A McGraw-Hill, the combined SRA at McGraw-Hill now, and McMillan McGraw business units. Higher Education, Professional Publishing and the remaining School Education Group businesses are scheduled for rollout in the fall of 2004. The international units will be completed during the 2005-2006 time period at which time we'll begin to realize the benefits from implementing the system on a global basis. We still anticipate the enhanced project to cost $180 million. Now let's look at some of the non-cash items. Prepublication amortization for this quarter was almost $130 million. This is a slight increase versus the third quarter of 2002. And we continue to estimate $280 million for the full year.

Depreciation for the third quarter was $19.7 million, basically flat with the third quarter of last year and the full year estimate is $90 million. Amortization of intangibles for the third quarter was $8.6 million, slightly lower than 2002 and we estimate for the full year $40 million. Precash flow continues to be strong. This is evidenced by the debt levels I mentioned earlier and we expect another very good year, and, of course we described free cash flow in a much broader fashion, going beyond operating cash flow. We define it as basically free cash after working capital needs, internal investments including prepub costs, capital expenditures, interest expense and dividends both before our one-time real estate projects and with that free cash is then available to repurchase stock, make acquisitions and repay debt.

And we'll have a very strong showing again this year in free cash flow. And finally a update on our stock buyback program. No purchases were made in the third quarter. On the year-to-date basis now we have repurchased 1,584,000 shares for $84.8 million, at an average price of $53.57. So far this year we are ahead of 2002's pace when we bought back 965,000 shares through the third quarter at an average price of $61.42 per share last year. And for the full year we continue to forecast that we will buy back 3 to 3.5 million shares. Now back to Terry.

Okay. That's the picture on the corporation for the third quarter and as we start to look to complete the year. It is the largest quarter. We definitely see improvement and to a year that has been mixed with so many other geopolitical events and all of those kind of things we're quite pleased with the position that we're in. Okay. With that, let's go any direction you'd like to go and let's go to the questions. Don?

Thank you. Just a couple of instructions for our guests here in the meeting. Please use the microphone when asking your questions so that our phone participants can hear the questions. Please be sure to state your name and your company's name. You may signal Sam when you have a question so he can bring the microphone to you. For our phone participants, please press star one to indicate you wish to enter the queue to ask a question. To cancel or withdrawal your question, simply press star two. If you are listening through a speaker phone, but would like ask a question, we ask you to lift your handset prior to pressing star one and remain on the handset until your question has been answered, that will ensure sound quality. Let's start now with any questions there may be in the room.

Clarence Seniors, Siemons Capital Markets In the area of expense controls you mentioned the initiative in terms of technology. I was just wondering could you maybe talk about what's been happening in terms of outsourcing some of the work that you have here in the United States and maybe sending some of the work over to some of the other countries where the labor is cheaper than the United States.

Okay. Thank you, Clarence. You know, clearly as a concept, we clearly look at all of our expenses and all of the vendor relationships that we have and we will always continue to make the best judgments that we can in terms of where the most appropriate and the most efficient use of those resources are. We do have some significant outsourcing initiatives,as you know, both in terms of paper, printing, binding, all of those kind of issues that relate to any of our more traditional print product are all handled by outside vendors with long-term contracts in very favorable way. In terms of P&L expense controls and the like, again, as we came into this year, we saw the recovery last year, starting to build in the second half. And it started to, obviously dissipate the end of January and we went through very tight controls throughout the organization. I might add, those were controls that were initiated back in the fourth quarter of 2000. And has been in a very tight format and has been, obviously has been a support factor to our earnings picture. Bob, do you want to add anything to it.

If I could add to that, in the GTP project which I've talked about, as well as some major development efforts with our construction information group, we have outsourced a fair amount of the code development work to locations in India. In addition to that, over the past, roughly 15 years or so, we have outsourced a fair amount of our fulfillment activity with our magazines, as well as a fair amount of activity when our shared service operations in the Galway, Ireland facility. So we have done a fair amount of outsourcing both in technology and non-technology areas as well and we continue to look at that, because there are great opportunities for excellent code development work and other technology development efforts at substantially lower cost.

I think that's right, Bob. I think that the success that we have had in Galway, Ireland has been impressive and it's been a shared relationship that we've had with the government there and a very cooperative one. We also developed a lot of partnerships around the world. We have a wonderful relationship in India with Tata. And we have the Tata McGraw-Hill relationship. We have been able to leverage off of those, both in terms of product development and initiatives that sell into the Indian market but also in terms of the development of that product and being able to expense some of that in country on that part. Those are two good examples on that.

Yeah?

Douglas Arthur Morgan Stanley. Terry, you've been pretty clear on the derth of new adoption opportunities in 2004, and then the good outlook in '05 and '06. I guess the question is with the backup in HR1 monies perhaps spilling into '04, and your other components of the division, how do you grow the entire educational professional division or can you in '04 if adoptions are as weak as you have laid out? And if you could update us on what that figure for new adoptions might look like again. Thanks.

Okay. And, again, you know we still have a moving picture on '03 and in December we'll be giving some guidance as to how we see the markets in '04, but I can give you an assessment of where we are at this point and a little bit of how we're looking at that. You're quite right, on the K-12 side, new adoption opportunities are going to be significantly less than they will be for this year. We're forecasting that this year we'll have about $750 million, and, again, I'm guessing a little bit now but I think new adoption total dollars for next year will probably, as I said before, I think are roughly in the $580 to 630 million mark, something like that and it will be the trough, the lowest level in the decade and it just happens to be because of the schedule and the way the schedule works. Now, we expect to do a good deal better than that kind of a forecast because of the fact of two areas on the K-12 side, both in term of the educational testing. As states get ready for the mandatory testing requirements that they have to fulfill by 2005 and beyond, and so that's going to be gearing up. The other one is this whole area of alternative basil and supplemental where we have a lot of our research-based product, the SRA, the Open Court, Everyday Mathematics, impact mathematics at the middle school level and so forth and these are really focused on the urban market. And one of the initiatives that we have taken is to strengthen our whole capabilities to focus on urban markets and the urban districts and to date we're having a good deal of success with these research products there, a little bit away from the more traditional basil programs. So we see those as opportunities for us into the '04 market. At the higher education level, we have to see where we finish up in '03 here to take a look at what kind of growth that we'll be looking for for '04, but clearly it's going to be an enhanced year for us. Especially because of the fact that the business and the economics category is going to be one that is going to be the highest level of activity next year and, of course that's a strength for us, and always has been. The other one I would add is increasingly what we're seeing at the higher ed level. Again, with some of the pressures from costs and tuition increases and the like, it is much more of a migration and quicker migration into the online world. And so a lot of the things that we've been focused on and developing we're seeing a good deal more success and we talked about some them, ALEX and the Power Web and the online learning centers and so forth. Again, I think that we will see some pressure at the K-12 in terms if the new adoptions as we get into next year. But the building, as Bob went through with some of the prepublication expenses, as we build up for that 2005, 2008 period is obviously ongoing on that one. But we think for those reasons we have some opportunities and that they are going to be more beneficial for us on that one. So I'm not looking for a robust year on that one but I think certainly in terms of the market we ought to be able to outperform.

John Cornrash of Sandler Capital. Given that your financial services area this year is so strong. I know you are not giving '04 guidance but looks like this year's to come in 12-13% on revenue, almost 20% on operating profit, wouldn't the theme for '04, frankly be we're going to have a good year, but let's look at the '03 numbers, that was a blowout. '04 has got to be a single digit transition year?

Well, again in terms of taking a look at next year we'll get there in December when we complete all of that. Standard & Poor's has been having an outstanding year but it's on top of an outstanding year and it's on top of an outstanding year and it's an outstanding performance because of the growth in the markets'. As we have seem this push, both in terms of privatizing initiatives and we were just a part of a whole initiative last week in Poland as part of how they're getting ready for accession to the EU and how a lot of the Central European countries are starting to privatize a lot of those activities and that's going to continue, that kind of activity on that part. The other is this whole securitized environment and as we have also seen, that with all the growth, the economic growth focused on the development of the consumer, what we needed to see coming into this year, and remember last year corporates were in serious decline, we needed to see the corporate environment come back, emblematic that business is beginning to assume risk again. We saw that increase after a negative first quarter, we saw that increase over 20% in the second quarter, and, of course it was almost 35% in the third quarter. We have projections of very similar numbers, again comparisons coming off a weaker basis. But we see that strength continuing. So we're -- that's one element, a very important element. But we also focused very much on the development of that global network where we see a lot of the local development activity and the non-traditional products which are significant, especially in that bank loan and counterparty credit risk. Credit derivatives in Europe as well is going to be an expanding market that way. On the non-rating side we also see, again, good opportunities in the independent equity research, continued performance on the index and portfolio management services and I expect them to be fully contributing as well. So it is a very nice picture on that one but one that we continue to expect.

Just one quick follow-up for Robert. I'm always confused by your cap ex comments. Does the 160 include Canary Wharf? That's the first thing. Secondly, does it include or not include the 60 million tech projects that you talked about and of that 60, is that all capitalized, or is part of that expense and some of that is capitalized?

Okay. As I stated earlier, cap ex is in three pieces. One, traditional capital investment; two, prepublication costs which is capitalized in the balance sheet; and additions to technology projects that are capitalized. With regard to the 160 million dollars, that's equipment, furniture, computing equipment, et cetera, that does include the Canary Wharf investment because that's basically furniture, chairs, fit out for the facility. So the 50 - 55 million is in that number. The additions to technology project that I mentioned, the $60 to $65 million is the capitalized piece on the balance sheet. When I went through the discussion I broke out expenditures for deferred project, one being expense, some pieces running through our P&L and the other piece that is capitalized. So the $60 to $65 million is capitalized on the balance sheet. In accordance with accounting standards you can amortize that over the life of the project and there are multiple projects.

Thanks.

Thank you, John.

John Janedis, Banc of America Securities. Terry, you talked a little bit earlier about Reading First grants. Is there a way to isolate the dollar value that's shifted, that you thought a few months ago would have been in '03, that it will now be in '04 and secondly, quickly can you remind us about your currency hedging policies. Thank you.

On the what?

Currency hedging.

Yes. Reading First. This is one that as we came into this year, we were, obviously with the alternative basil on supplemental area, John, we were focused on those Reading First dollars. We know that those allocations were made. And those grants were sent to the state. What we saw was a deliberate slowness in how those dollars were getting actually to the schools and to the districts. At that point, they were talking about a 20% set aside that the states could hold that portion of the funds and 80% had to go to the school districts. We have worked with the Secretary of Education on what they are doing to make to make sure and mandate that they get there. They've just been slow and I think, when all is said and done, what we'll have seen that given some of the state softness that they have held back, the finance directors have held back, some of those funds and earned interest on them, but they are now making their way into the market. So we fully expect, and because of some of the grants that we've already seen and some of the success that we've had, we're starting to see those dollars very clearly now and I think in the fourth quarter we will see a benefit from those. As we get into next year, I think that is a big portion and a mitigating portion to some of the softness that Doug was talking about in terms of some of the adoption activity. I do believe that those Reading First dollars are there. I think it's been just slow and a deliberate slowness of getting to the schools in that marketplace. I think there's also been an issue which has been largely cleared up, sort of a fungibility one, in whether or not these products over here qualify as Reading First initiatives and so forth. But I think a lot of that confusion, that may have been there in the beginning of the year is gone and therefore, I expect full execution of those. And by the way, as we get into '04, you have two slugs now. You have this year's fiscal dollars in that fund and you have another billion that is out with a new federal fiscal year. So I think it is a very good picture. We're going to watch very carefully together as we see where these dollars are and track them into the market. And that's why we've gone state by state by state and Don can give you the listings of exactly the grants, the dollars that have been given to each of the states and we wanted to make sure and we're working with those states to make sure those funds are getting into the districts. As far as currency hedging, that's not an area that we are very active in, but, Bob, go ahead. Do you want to --

Yeah, I will pick up. We did not hedge. We have, in many cases, in different locations we have natural hedges based on the configuration of our different businesses around the globe. In a lot of locations it's because of the nature of how to conduct business. We bill our customers in different currencies, some of those being U.S. dollars. So as a result there are natural hedges that generally occur. To put this in perspective, the impact on the third quarter in terms of currency was about $13 million in revenue. And that breaks down about 5 million of that was in education and $8 million in financial services. Now coincidentally, as Terry mentioned earlier, the growth in financial services would have been higher than the 15% reported because of the absence of MMS from this year versus last year when we had sold it. The absence of MMS from last year and the currency impact virtually offset each other. Both were about two percentage points. So the 15% growth you can look at as organic growth, one absent the loss of MMS revenue and stripping out foreign currency.

Donald?

All right we'll go to questions on the call.

Thank you. And our first question will come from Brian Shipman with UBS.

Thanks. Good morning. If you could expand a bit on what happened in the Texas elementary social studies adoption, how that 7% share result compared with your budgets for the adoption there. And secondly, could you talk a bit about why share repos didn't occur in the third quarter and really what the focus there is on paying down debt so aggressively in light of low interest rates, why not buy back more stock in the current environment? Thanks.

Okay. Brian, on the share repurchase net program, we have, as you know, we've got a program that is a five-year rolling program, about 3, 3.5 million shares that we want to buyback every year and we're very pleased with that program. Obviously at any given point in time, you could accelerate or decline that and that's why we take a look at it over a five-year period but we see no change in that capacity. I think when you start talking about the balance sheet and a lot of the improvements on the balance sheet, it goes right back to the environment that we found ourselves in the year 2000. As we started to see all the interest rate hikes then, and the slowdown of the environment and really the fourth quarter hitting a wall and we got very aggressive, not only on P&L cost controls and the like, but also in terms of the investments that we're making in core areas or focus and prioritize on core areas and really starting to tighten things up. And I think that one of our initiatives in terms of the balance sheet was to significantly be able to improve the efficiencies of our cash generating capability and you've seen the results of that, now the notion of capacity is one that we feel quite good about. It gives us a lot of flexibility. It gives us a lot of flexibility in an environment that's going through a good deal of change and it allows to us focus on some of our organic investments. It takes a look at being a little bit more aggressive with some tuck-in acquisitions and the like. So we like going into the environment that we're in, with it improving. I think that we have this type of capacity to use, but, again, it's a decision that we look at all the time, and it just gives us more flexibility on that part. As far as the Texas social studies. If I went into this year, Brian, thinking that I was going to get a 7% market share in the K-6 social studies, that just wouldn't have happened. We just did not do well, again, in the McMillan McGraw-Hill K-6 area. It has been a source the last couple of years of weakness for us, and it is something that has taken on a great deal of attention. And you can, with all the changes that we have made, not only in terms of program format, but in terms of talent and in terms of process and procedure, again, just as it takes two, three years to develop a program for market, it also, in terms of the strengthening of the organization, that also evolves as well. Now one of the things that I am very pleased at, I mean, you're talking about one of my hot buttons. We are going to take back the leadership in the K-6 level. And this was another disappointment for us. And we're so strong at the middle school. We're so strong at the high school level. And there's absolutely no reason why we shouldn't have that level of strength at the elementary. So we've made a lot of changes and I'm very pleased with the open territory sales that we have seen in the third and the fourth quarter coming out of McMillan McGraw-Hill. As we go into next year, and we're coming out with a new math program, and we're going to be able to do that both through basil and alternative basil, with things like every day math and impact math that we've already talked about but also in terms of our more traditional McMillan McGraw-Hill offering and we expect to do very well with that, but it's going to be a start of building back the leadership dominance that we want in that elementary sector. So we were very pleased with the 38% share at the middle and the high school level in Texas and 28% total share in Texas is fine but when you have 7% market share in K-6 that's not. And that won't be tolerated.

Thank you. Our next question will come from Fred Searby with JP Morgan.

Good morning, gentlemen, thank you. A couple of quick questions. One, c an you touch upon the new legislation and the outlook for structured products in Germany, the timing of that and how meaningful it is in terms of driving growth going forward and then secondly, can you also talk about the disparity between international prices at the university and the domestic prices and some of the arbitraging that's been going on and how meaningful that is, or whether that really is materializing as a problem.

Okay. What legislation in Germany are you talking about?

My understanding is that Germany is actually passing legislation that's going to enable certain class of structured products and that that could be a strong driver going forward for the market and I wondered if you could touch upon that.

I'm not as well versed on the specifics of the legislation. We can get that for you, and if you can come back to Don Rubin on that we'll get specific. But I can tell you this, the structured finance unimarket in Europe is red hot, both in terms of mortgage-backed activity, as well as asset-backed activity and we're seeing that through the trends of, obviously the growth in consumer with credit card receivables and student loans and the like, but also in terms of both the residential and the commercial mortgage-backed markets as well. That's been a tremendous source of growth for us. In the third quarter alone, let me just get these for you, Europe was up 34 billion, which was 134% increase quarter-over-quarter and for the nine months year-to-date, structured finance activity in Europe, total activity, was about $91 billion which is 111% increase, again, nine months year over year on that part. Bob?

I think this specifically relates to the mortgage-backed area and this just creates a tremendous opportunity really to follow the success that we've seen in the UK Europe area, now specifically rolling into Germany. So it just gives us greater opportunities for excellent double digit growth in structured areas within Europe for next year.

Terrific. Okay now on the textbook. I think you must be referring to a New York Times article that appeared earlier this week talking about a student who found a textbook in London that was at a lower price than our product here. We price our materials to local market conditions. And, again, it is not a singular textbook or a program. You have to take a look at the whole value proposition that you are providing to the instructor, to the student, and to that classroom activity. When you start to take a look at the textbook, that is one component of a, in this case it was an economic text but of a particular class and therefore in terms of the value proposition and what it is that you are providing, we price, obviously to the totality of that value proposition, and therefore you're going to get inequities and apples and oranges in terms of that kind of comparison. But we have no problem in terms of being able to price to local markets. I think when you take a look overall at any intellectual property rights, whether it's pharmaceutical companies or whatever, the question is, in terms of the market demand and how you can satisfy that market demand, there's lots of different ways to do it. And if we can do it in a cheaper way, by using different kinds of paper, or less formatting or we can do it in an online capability, we will do whatever to satisfy the specific local needs that exist and obviously pricing will be a function of that value proposition. So it took an issue sort of out of context to the totality of the value proposition that you're trying to provide on that one. But we can go into that in any direction you would like but we also with Asian student edition do different things in those markets as well.

But do you see, on a related note, I mean do you see sort of adding on -- I know it's the sum product these kind of ancillary things, the text book that's driving absolute growth, university, that continuing trend, kind of 20% kind of numbers?

I think the thing to watch in terms of, again, value propositions and pricing is the push, especially at the higher ed level, into the digital learning space. It is going at a very rapid rate and it has significant cost implications, reduced cost implications and therefore pricing implications as well on that one. But I think as we have seen here in the domestic markets that there is a faster push now given a lot of the other pressures that colleges and universities are under, and solving with tuition rate hikes, a push to get into that online space, which I think have further implications in terms of what you can do in terms of enhancing that value proposition. But it also is going to have financial ramifications as well. Incidentally, you're going to hear an awful lot, this is a little digression from your question, but you're going to see as we have seen in the United States a push for educational reform in the K-12 space that you are going to see a growing crescendo of arguments in terms of an education reform movement at the college university level in terms of student achievement and accountability and certain standards, and the like. And a lot of that is coming from a heightened voice of business that is finding itself hiring college graduates that are not capable of being able to be as strongly useful in the work force and you are starting to see a good deal of movement that way, especially with public universities and the like.

Thank you, gentlemen.

Thank you and our next question will come from Lauren Fine from Merrill Lynch

Thank you. Following up I guess on that question, could you actually break out for us, of your college business, what percent is domestic and what percent is international and what the respective growth rates were in the quarter and related to that, could you be maybe a little more specific on what the growth rate was of U.S. college for the first nine months of the year and then, Terry, you were making the comment, and I would agree, that on the higher education side the move to online is a significant one and I'm thinking specifically the University of Phoenix's recourse program. Could you discuss how significant that has been for you?

Yes, thanks Lauren. Bob, you can have the first one and I will take the online environment. By the way, I will say this on college, where we have seen some profitability improvement here, but we have seen a little bit of a decline in the overall college market in terms of some of the projections that we have. Some of the numbers that we gave you for the 8 month, or AAP, showed that it was 3/10th of 1% growth, but we know that from our own factors with September and as we push into December which is also a very important month for them, it's going to be a lot higher. But I do think that some of the ordering purchase patterns that we have seen to create lower returns, which is good for us, in terms of profitability situation, and we have to see where the reordering starts to come in, if people are having lower initial orders and also some of the tuition increases throughout the country that I think has had an impact on enrollments. We just don't know at this point to what extent. It has been real on that one. And so it looks like the market is going to be positive, obviously and that's right. But I think it might be a little below where we thought it was going to be by year end. Consequentially, I think you're quite right with areas like the University of Phoenix which is doing extremely well. There is not just a push into the online education space from people that have been affected in the work place or are going back to learn different skills or between job positions and all of that. We're starting to see traditional students in growing numbers going into that environment and that's why we've been very aggressive in the development of some of those programs that we talked about, most importantly the Online Learning Center and all of the capabilities of that. But also into these programs like SimNet and ALEX and Power Web, which is a tremendous support tool, as well as in terms of some of the educational testing areas, especially in the formative area on that part. That's a significant source of growth for us and one that we plan to enhance. Bob, do you want to add anything on the college? We don't breakdown -

Yeah, I will just add a point or two. We do not break down, as you know, Lauren, Higher Education, it's part of the Higher Education Professional Group, but when Terry talks about our performance versus the market, domestically in the revenue line, domestically is only U.S. sales. When we ship product overseas that's not counted in revenue within the U.S. figures, so when Terry is quoting information that we may be tracking better than the market, and we are, that's purely apples to apples and that's U.S. business. As a rule of thumb, because of our distribution operations with the sale of straight U.S. products, just shipped over there and sold or the adaptation of product into British English or whatever it might be, or translation, as well as royalty rights, roughly 50% of what we sell domestically finds its way in the revenue line in our international operations. As we look at our operations globally, in terms of our foreign source revenue, we had very strong performance outside of the U.S. in the third quarter in the Higher Education Professional Group and that's driven in large part by Higher Education as well as Professional, as well as their local product sales. So although we might have had overall modest revenue performance for the segment, outside the U.S. was rather dramatic over and above currency.

Lauren, I have to think now, Bob, I think you can have your answer. I think he's given us a math lesson here in algebra.

Actually it's a little over 50% of the total. I didn't say what but it kind of gives you a perspective in terms of what we do outside the U.S.

Great, thanks.

I think I can solve for x in that one.

Thank you. And our next question will come from Steven Barlow with Prudential.

Thanks. A couple of questions on the media side of the business. Expenses were down about 5.9 million, could you articulate what areas of expenses you were able to cut versus last year? October pages on BusinessWeek, could you give us an idea what's happening there. Political, what was the comp '03 political dollars versus '02 political dollars. And then lastly, foreign exchange looked like it was about four cents help for you in the quarter. Was there a help in foreign exchange in the third quarter of '02? Thanks.

Advertising environment overall, Steve, has been slower than we expected in terms of the recovery, I think that's one element of it. The other is I think as it evolves, I think it's going to be stronger because as we're seeing in the type of advertisers coming back to BusinessWeek, these are large product specific advertising that's coming back. It's coming from the computers and communication, from the technology sector, a little bit from financial and so I think that is a very positive sign that business is starting to pick up, activity is starting to pick up and therefore, correspondingly, we should see that kind of advertising leading the way in terms of BusinessWeek. We could portend, I think, more strength as equipment spending numbers stay up in the 9, 10% level as we get into next year. So October is benefiting from that and we will benefit from out issue advertising events into November as well as into December. It's just hard to tell. Again, a large advertiser or a couple large advertisers can skew it a little bit at this point, because, again, we're working off of a little bit stronger numbers in BusinessWeek in the third and fourth quarter of last year as we already saw the recovery start to take shape on that part. It's a little bit slower than we expect but October is pacing well. November is also pacing well and more importantly I think we're getting a nice build as we go into 2004. Bob, do you want to due media, foreign exchange, and political dollars?

Okay. With regard to foreign exchange, let's start with that one first, Steve. The benefit in 2003 is about, roughly 2.5 cents. And in 2002, for the third quarter, there was roughly a charge of about a half a cent. So it's a net swing of about three cents on a quarterly basis year-to-year. That's point number one. With regard to the cost in terms of what we're doing within the information and Media Services area, we've continued to rationalize that at the infrastructure there that we have just in light of the economic situation that we're faced with. We focus on staffing levels very hard across the board, whether it be in BusinessWeek or broadcasting, et cetera, and the deployment of technology. As a point of reference, within the broadcasting sector, we operate in terms of head count at a lower level today than we did when we purchased the stations back in the early 1970s. And that is driven in large part by the use of technology and we're leaders in terms of the number of different station groups in terms of how we utilize technology in the deployment of the operation and how we actually run the program rooms, et cetera. And also the comments I mentioned earlier about manufacturing. Manufacturing benefits the production of the magazines, as well as the book side. So as we benefited on the bottom line, on an overall basis from manufacturing that benefits information and Media Services as well.

Bob, the political dollars?

No, I don't.

We'll have to get that number for you. The political dollars last year, I'm going to guess is probably was somewhere around 5.5, 6 million, somewhere around there in non-national election, which it usually gets up to about 10 - 11 million, and, of course, we benefited a little bit from some of the governor recall in California. But nowhere near that level. So it's an offset but call Don Rubin, Steve, and he will give you the exact numbers for you.

Thank you.

Thank you. And our next question question will come from Brandon Dobell from Credit Suisse First Boston.

Morning, guys. Just a real quick one. Could you kind of give us some color on how good of a proxy, when you talk about the growth and exchange traded funds being up, I think it was 60% something like that, how good of a proxy for revenue growth in those kinds of products is that. Just trying to get a better flavor for what the business model is on the information services side of that division. Thanks.

Sure. Again, the fees that are generated are off the assets under management and that's why we give those numbers on that one. We had year-over-year a 35% increase in the assets under management and it took us up to a little under $70 billion, I think it was 66.6 billion on that one. And the whole game plan, Brandon, is that there's endless permeations to the type of product that you can develop here. Developing product in tandem with others, as well as in the Korean situation that we mentioned and the relationship with Samsung or in terms of area geographic and sector funds and the like. And so that's what we've been building out on. The business model is based on fees associated with the assets under management and that's the number that we have to watch in terms of its development.

Okay. Thanks.

Thank you. And our next question will come from Kevin Gruneich with Bear Stearns.

Thanks, two questions. I was wondering first, Terry, it sounds like not only in the higher ed business but also in K through 12, that you're pointing to some deferral into Q4 and I was wondering now that we're into Q4 if you could kind of discuss the extent of that deferral, and then secondly, if you could talk to your views on total year-to-date share in K through 12, both in the adoption states and the market overall.

Okay, great. Kevin, in terms of the deferrals and cancellations, it has not been significant. Where we have seen some has been in the open territory side. The one adoption state that we talked about was Kentucky, and that was about a $13.5 million opportunity and that won't, in of itself, skew the numbers. But what we're seeing is that we have seen some postponement there, and what we're trying to figure out is are those dollars going to be coming back in '04 and it looks like in Kentucky's case, it will on that part. In the open territories, and one of the reasons that we were looking for a little bit of growth in the open territory side, but we called now I think it's going to be flat year-over-year and it's roughly 1.9 billion on that one. And the reason for that is because, Kevin, I think you had seen some deferrals from some of the smaller states and we'll just have to see how those get played out. It's not clear whether they're going to be coming back in '04 or whether it will be longer periods. But, again, the longer you program, you guys, the more it puts you in a difficult position to achieve some of the results that you're going to have to achieve by having taken on federal dollars. My guess is those would come back fairly rapidly on that part. Let's see -- I'm sorry, Kevin, the other one was, oh, on K 12. Yeah, elementary did have an impact on us. Social studies was big in Texas and the 7% share at K-6 did have its impact. I've used on any given year that a benchmark for us should be about 30% market share from the total dollars available in the K-12 spending area. My guess is that we don't have the exact numbers at this point. We might fall just a little bit below that 30% for '03. And that would be influenced, again by the K-6 social studies. So it would be close, but it will be probably just off a little bit on it.

Thanks.

Thanks.

Thank you. And our next question will come from William Bird with Smith Barney.

Terry, I was wondering if you could comment on what percentage of S&P credit market revenues are now from structured finance and just secondly, I was wondering if you could clarify your '04 adoption spending outlook. I believe you indicated around July you were expecting about $690 million in adoption spending next year. I thought you said earlier 580 to 630 and has your outlook changed that much.

Let' go to the last one. In terms of total adoption dollar opportunities new adoption dollar opportunities next year, Bill, it is, again, it is a moving target and it's a guess at this point, but as we add it up, in terms of those opportunities that will exist, I think it's somewhere around 580 to 630. I think it's somewhere in that area. And, again, that's new adoption dollars on that one. Now if, as Kevin was talking, if some of the deferrals and some of the cancellations, especially in the open territory, come back, maybe there's some improvement in those numbers but our guess at this point, in terms of just adding it up, that it's probably somewhere around 580 to 630, in there and as we get closer and we start seeing activity levels we'll be able to strengthen that up. What was the other one?

The other was what's the percent of structured.

Oh, okay. As you know we don't break that out but I can give you some numbers on that. If you take a look at just the nine months year-to-date, the structured finance market, the total structured finance market in the United States is about 705 billion, in terms of new dollar issue and that combines residential mortgage-backed, commercial mortgage backed. That also has all of your asset-backed securities as well as your collateralized debt obligations, your CDOs. So that's about year-to-date nine months, that's actually $706 billion and in Europe, that's the United States number, and in Europe, that total number is $190 billion. So those are very sizable numbers and very sizable increases on that one and therefore a significant part of rating activity.

Terry, one point that perhaps I can answer from a previous question related to political advertising in the third quarter. Overall basis across all the stations political advertising in 2003 was about $1 million approximately and that compares to about $1.9 million for 2002. 1.9 million for 2002.

My guesstimate was a little off. Thank you for getting that.

We're going to the last question now. That was it? He dropped off. Okay.

Thank you.

Okay. Again, thank you very much for being with us. An improving situation and we're very pleased with the way the third quarter finished out and now we're looking forward to finishing the year and we're online to our guidance that we'd given on earnings. Thanks very much.

Thank you. That concludes this morning's call. On behalf of the McGraw-Hill Companies we thank you for participating and wish you a good day.