標普全球 (SPGI) 2004 Q1 法說會逐字稿

Good morning and welcome to the McGraw-Hill's company first quarter 2004 earnings call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. Donald Rubin, Senior Vice President, and Investor Relations of the McGraw-Hill Companies. Sir, you may begin.

Thank you. Good morning and thank everyone for joining us here at the McGraw-Hill headquarters building as well as people who are on the west coast and overseas, on the phone and on the web for this morning's announcement of the McGraw-Hill Company's first quarter 2004 earnings. I'm Donald Rubin, senior vice president, Investor Relations of the McGraw-Hill Companies.

With me are Harold McGraw, III, 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 first quarter 2004 results. We trust you've all had a chance to review the release. If you need a copy of it and the financial schedules that come with it, they can be downloaded at www.mcgraw-hill.com/investorrelations.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the private securities litigation reform act of 1995, including projections, estimates, and descriptions of future events.

Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially for results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our form 10-K, 10-Q and other periodic reports filed with US Securities and Exchange Commission. We're also aware that we do have some media representatives with us on the call.

However, this call is for investors and we would ask that questions from the media be directed to Mr. Steve Wise in our New York office at 212-512-2247 subsequent to this call. Today's update will last approximately an hour. After our presentation, we will open the meetings to questions and answers. It's now my pleasure to introduce the chairman, president and CEO of the McGraw-Hill Companies, Harold McGraw.

OK. Thank you very much, Don. Good morning to all of you here and if you are joining us by Web cast or by other means, we welcome you, as well. We appreciate your interest in the companies. Welcome to our conference call. As you know, and as Don mentioned, earlier this morning, we reported first quarter earnings to the McGraw-Hill Companies.

The year is off to a very good start somewhat better, in fact, than we had anticipated only a month or so ago. We will discuss the reasons for that stronger than expected performance in just a moment. But before reviewing our results this morning, I want to take a moment because I know how many people here know Leo O'Neill and pay a tribute to my dear friend and colleague, Leo Neil, who contributed so much over the years to Standard & Poors and the McGraw-Hill Companies. Leo died last week at the age of 64.

He had recently retired as president of Standard & Poors, and he had an absolutely outstanding 36-year career with them. Many of you, as I said here and on this call, knew Leo and recognized that he was an exceptional leader who helped make Standard & Poors the success it is today. I've worked with Leo for 24 years. Actually, a little more than that, and I count that as a privilege. We and so many others have benefited from his lifetime of achievement. He leaves behind a very solid team, one that we're all very proud of and we will build on that for the future. We will miss him. Kathleen Corbet, will lead this team. She was appointed president of Standard & Poors earlier this month.

She comes to us from Alliance Capital. Kathleen is a broad-gauged executive with experience in fixed income and equities, global markets and the application of technology in our business, all the qualities we need to keep Standard and Poors moving ahead in the excellence that we expect and plan to achieve. She's a terrific person, and I look forward to introducing her to you and each of you in the days ahead. OK, let's focus on this morning's news and the details on our first quarter results. Revenue increased 9.7%, diluted earnings per share based on net income was 39 cents.

That reflects a one-time, non-cash benefit of 10 cents per share from accrued tax liability following the completion of various audits at the federal, state, local and foreign areas. The operating margin in the first quarter improved in all three segments. In looking ahead, we obviously are very encouraged by the improving rate of economic recovery. In particular, some of the signs and indications that we have seen in the month of March.

Don't be surprised if you begin to see higher forecasts for GDP growth this year. We already started to see some acceleration of some economists thinking that way. Corporate profits are growing. Capital spending for equipment is growing. A little bit faster than early expectations. We're looking at equipment spending now on a full-year basis around 14%, and we came into this year saying about 12.

Retail sales are stronger than expected, and that led to speculation that the Federal Reserve may increase interest rates sooner than the market expected and expected only a few weeks ago. Our guess at this point is that you might see a Fed movement in rates somewhere in the June-August timeframe, but prior to that, our expectation was that it would be after the election, but somewhere in that timeframe is what we're looking at. But, again, if employment growth or inflation weakens, the Fed may delay any rate hike again until after that election so we'll just have to watch those events.

In any event, we will continue to operate in a low interest rate environment. Inevitably, there will be some speculation about the impact of rising interest rates on the performance of rating agencies. Again, I think that if rates are rising, it's really more of an expectation of higher growth rates and therefore shifts in terms of some of the mix will take place.

We strongly believe that financial services will achieve its target this year, once again, double-digit, top and bottom-line growth. Although, perhaps, again, as we've said, not perhaps at the growth rate levels of last year, but, again, double-digit, top and bottom. We also know that financial services faces somewhat tougher comparisons as the year moves along, and we expected that a little bit as we came into this year, and that hasn't happened.

After considering all of these factors, including a low elementary high school adoption market, we're maintaining our guidance for the year. That means we continue to project that income from continuing operations will increase in the mid to high single digits in 2004 and that's without the reoccurrence of the 30-cent after-tax benefit from the sale of our equity interest last year in Rock McGraw. Okay.

Let's move to our operating segments and let's start our review with the prospect for financial services and do so in more detail. Standard & Poor's set the pace for our first quarter. Revenue increased 16.6%. Operating profit grew by 19.9%, and the operating margin was 38.1%.

An outstanding first quarter performance was anchored by a strong close in March. New issue dollar volume in the United States market grew by 10.4% in the first quarter, and was up 42.1% in Europe. If you get behind those numbers, you can get some notion of the market's strength in March. In the first quarter, U.S. dollar volume issuance in March alone accounted for 35% of the corporate market, about 43% of public finance activity, about 44% of the residential mortgage backed security market and about 42% of the asset-backed market.

In looking ahead, we see somewhat tougher comparisons. Dollar volume issuance in the United States structured finance market in the second half of 2003 showed year-over-year growth of 42.4%, and that was paced by residential mortgage-backed security issuance, which was up 49.8% in that period.

The pipe line for residential mortgage-backed securities continues to look good into April, so we expect the first quarter momentum to continue into the second quarter, but we still expect the residential mortgage-backed securities market to slow down after a stronger than anticipated first half, but then, again, I said that the end of last year only to see it prolonged, but I think reason would say it needs to or it would slow down somewhat.

The outlook remains healthy for collateralized mortgage backed securities and the sector continues to experience very strong investor demand. Asset backed issuance was off in first quarter, but started to pick up again as we got into March. We still expect growth in this category of 2004, and it's coming from more auto financing, increasing credit card receivables as consumers continue to utilize credit card debt. Student loans will also be a factor here and will contribute to the growth of asset-backed securities.

In the corporates area, high-yield issuance was the pace setter in the first quarter against somewhat easier comparisons because this market didn't begin to show significant growth last year until May, but it has been impressive. We continue to see healthy issue in the high yield area.

There is investor demand and historic low interest rate, favorable credit spreads and merger activity and a pickup in capital expenditures. Some of these factors will lead to improved issuance in the investment grade corporate market, which will benefit obviously from the continuing economic recovery and growing investments to expand capacity. Growth in the municipal market remains somewhat problematic even after a very strong March in which many issuers took the opportunity to restructure debt.

A key to our future will be continued strength overseas and in the non-traditional products and services area. Ratings overseas outpaced our domestic service in the first quarter, and we expect that trend to continue. A diversified portfolio of ratings, ratings-related services and newer risk management products are moving us ahead in Europe, even as we reduce our reliance rather on new issue volume. Structured finance continues to grow rapidly also in the Pacific Rim. Japan, Korea, Australia all showed solid gains in the first quarter and prospects are favorable for the rest of the year.

In Japan, we also saw a comeback in bond issuance. The structure pipeline there is very promising, and we had a very good first quarter in Latin America. It was very strong and the outlook is still very positive. Favorable interest rates in Mexico, reform in Brazil that's controlling inflation. The toll road transactions in Chile have gotten this market off to a about start in 2004.

Ratings not tied to new issuance continue to grow more rapidly than many of our other traditional services. Counter party credit ratings, rating evaluation services and financial strength ratings of insurance companies all produce solid, double-digit gains in the first quarter, and we expect these non-traditional products and services to keep growing at a good clip. We're also continuing to expand our index services business. In the first quarter, we launched the S&P CITIC, industries from China A-shares, a 50 stock index and a 300 stock index. Soon, an ex-change traded fund based on this index will be listed on the Shanghai stock exchange and the Shanghai futures exchange will start to trade index futures. In Italy, trading of futures and options is underway based on our S&P/MIB-index of Italian blue chip companies developed in collaboration with Blueso Italiano.

In United States we just introduced the S&P o-strip index. It's comprised of all the stocks in the S&P 500 that are listed on the NASDAQ 100. The S&P O-strip index will be the basis of the new exchange traded fund on the American stock exchange under the Spider brand. In Europe, we developed the S&P Europe registered funds indexes, which track actively managed mutual funds that are available to investors in France, Germany, Italy, and Spain. Coming in May is the S&P equity long/short sub index of the S&P hedge fund index, and we're continuing to make progress with our new S&P Citigroup indexes.

We have several new customers for custom indexes. One major asset manager and shortly we'll announce a significant public pension plan that has come onboard. So it should come as no surprise that assets under management and exchange-traded funds based on S&P index continue to grow. At the end of March, $81.3b was under management, an increase of 34.6% over the first quarter of 2003.

Another plus later this year will be revenue for S&P research. S&P continues to work with the independent consultants at the 10 firms involved in the global research settlement, and we remain optimistic about our opportunities there. The settlement firms must start providing independent research to their customers by August. At the outset, they will focus on the basics of the spending of the 432.5m will not be divided obviously evenly over the five years.

Spending will probably start a little slowly and then pick up as programs are fully implemented. At the outset, the firms will be monitoring usage and considering ways to expand and improve the coverage that they're provided which could also create new opportunities for Standard & Poor's. We're realizing new opportunities to sell research to non-settlement firms both here and outside of the United States. S&P has been selected to provide research on equities and mutual funds to H&R block's 1,200 financial advisers, Legg Mason, N-guard brokerage and USAA also recently selected S&P research for their clients and one of Japan's top banks, the UFJ Bank, is licensing S&P equity research for clients and advisers in its UFJ Securities subsidiary. The take-away from all of this activity is simply this.

Our earlier forecast for financial services has not changed. We still expect financial services to produce double-digit top and bottom line growth in 2004, although, again, the rate of growth won't probably necessarily match last year's. We also still expect to achieve an operating margin that matches last year. In closing, let me share some thoughts on rating agencies, the regulatory scene, and the global Capital Markets. We continue to monitor developments closely both here and abroad. We are in active dialogue with regulators and key market participants both here and in Europe. We're encouraged because the value of ratings in global markets has been and continuous to be acknowledged. It's also very clear that Capital Markets value ratings because they are objective and independent opinions.

In the near future, we expect to hear more from the SEC and from IOSCO. IOSCO is the international organization of security commissions. Last September, IOSCO issued principles governing rating agencies. Those principles largely reflect S&P's current practices IOSCO now has a task force as currently drafting a code of conduct for rating agencies. The draft should be finalized later this year. As with all regulatory initiatives, S&P is closely involved in discussions with regulators about the issues, and we do not believe that any of the proposals currently under review would have a material, adverse impact on S&P.

Let's move over to McGraw-Hill Education. Revenue here increased 6.4%. The seasonal operating loss was reduced by 2%. Typically, the first quarter results don't really indicate how the year will turn out in education, but it's always preferable to start on a positive note. Revenue at the McGraw-Hill school education group grew by 8.6%, signaling to us that the federal No Child Left Behind act is beginning to have some impact on the market, particularly in the early childhood learning and education areas for reading and testing, areas of obvious strength for us. We've pointed out before that an estimated $1b is now in the market for reading first. One of No Child Left Behind's a key programs. About 50% of the reading first funds will be spent for staff development and reading coaches with 20 to 30% going for instructional materials and the rest for assessment.

The department of education has another billion dollars of reading first funds to award this year between July and October and that would be for the third year of this six-year program. We recently confirmed that recipients have 27 months to spend each year's grant. Unlike unlocking reading first funds has not been quick nor has it been easy.

The department of education insisted that the state submit detailed plans on how they will use the funds and now the states require grant proposals from the local education agencies before releasing the funds to them. There are more than 3,600 eligible local districts for reading first funds. New funds have yet to be released in some states, but as our results indicate, we have begun to see activities in others on the local level. We have seen it in Wisconsin. We've have seen it in Ohio.

We've seen it in Kentucky, California, New York, Illinois, Massachusetts, Maryland, and Missouri. Educators are turning to our programs for pre-K reading preparation, programs like DLM express and open court. For primary grade instruction, we have programs like reading mastery, open court reading, and breakthrough to literacy. For remedial work in grades four through six, we have programs like corrective reading and fast track reading.

They're also purchasing our reading labs and other supplemental materials for building vocabulary, comprehension and influence and to help with teaching of phonics. We believe this early activity signals a new national commitment to the teaching of reading. Clearly stimulating such a commitment to improve reading in the early years is one of the primary objectives of No Child Left Behind. Spending activity is developing largely as we anticipated. Although, the distribution of funds, as we have talked many times to the local agencies, has taken longer than initial anticipated. We see more funding being released in the second and the third quarters as districts gear up to offer programs when the new school year starts this fall.

We continue to believe that our research-based programs, which closely match the federal guidelines, will enable us to capture a substantial share of the reading first market. The outlook in testing is also very promising with opportunities for content development, research design, program management, scoring, reporting, and providing these integrated solutions linking assessment and the instructional strategy. As a full-service assessment provider and the leading brand in the marketplace, CTB McGraw-Hill provides capabilities in all of those areas.

We recently captured a new statewide contract for Arizona and finalized a four-year contract to provide test development and scoring for West Virginia schools as part of the program, we will deliver a customized version of CTP's I know on-line assessment for approximately 200,000 West Virginia students in grades three to 12. This is a first statewide implementation of the I Know program, and we see increased interest in adopting I Know statewide to meet the requirements of No Child Left Behind and we call our reporting system I Know progress, and it was purchased last year by the state of Indiana.

The testing market will expand as states build out on programs to meet No Child Left Behind act requirements for standards, annual assessments, corrective actions, and annual state report cards. Starting in 2005-'06 school year, children in grades three to eight will be tested annually in math and in reading. And under No Child Left Behind, approximately 390m a year is going to states to help pay for the cost of developing additional standards and assessments. Most states supplement those allocations.

We continue to believe that reading first funds are the Wild card in this year's elementary high school market. We still expect the markets to decline about 5% this year largely because of the lightest new adoption calendar of the decade. Our estimate for the new adoption market this year remains in the 525m range.

Math represents the major opportunity in this year's adoption market and it's obviously still too soon to call. We're seeing early strength in the middle school. We're seeing early strength in the high school market where most of the revenue is available. There's some softness in the lower grades, although there are signs that everyday mathematic, our research-based program coming out of the McGraw-Hill learning group is continuing to add new customers and will be a market leader.

In short, there are early indications that our strategy of offering a broad selection of products in this discipline will help us achieve our target in net this year. The higher education professional and international group produced a 4.7% increase in revenue in the first quarter. Higher education sales both here and abroad were important contributors to this performance. In the US, college, and university market, three business and economic titles performed particularly well in the first quarter. Body, Investments, the sixth edition, Nichol Understanding business, seventh edition, and Block, foundation of financial management is in the 11th edition.

The science, engineering and mathematic imprints also contributed importantly to our first quarter performance. We have some continued softness in the computer book market that is still affecting our professional sales, although, we did see a pickup in scientific, technical, and medical products. Its early days in the college market as well, but indications here are also encouraging.

Major revisions to some of our key business and economic titles are getting a good reception from instructors. We still expect to outperform the industry, which we will think will grow in the 2-3% range this year. No change from there. So let's sum up the McGraw-Hill Education, early signs that reading first money is starting to reach the marketplace. Prospects continue to improve in testing. We expect to outperform the high and higher education markets this year.

OK and finally, let's move to the information and media services segment. Revenue for this segment increased 1.3%, but operating profits grew by 9.4%. The operating margin was 7.7. Late in the first quarter, we began to see signs of real improvement in advertising. The broadcasting group reported a 5.8% increase in revenue. Even though the super bowl this year was on a rival network, but a stronger based business, political advertising and the academy awards all contributed to the improvement. We're currently pacing a 4.2% for the second quarter because of softness in national advertising in the Denver market. If not for the situation in Denver, we would be looking at a double-digit figure. March was clearly the best month of the first quarter for business week.

After the first two months, business week trailed last year, by almost 12%, 11.8% pickup in March ad pages moved publication ahead last year by 2.6%, and that's according to the publisher's information bureau, a very encouraging sign. By the way, "business week" made more progress in April based on issues April 26th, "business week" is up 9.1% for the month and 4.5 for the year, and we're starting now to see some real progress to the recovery that's in full bloom.

We're encouraged by the number of new accounts, "business week" continues to attract. The magazine added more than 80 so far this year, which is an impressive start. There are other important measures of success, "business week" is celebrating its 75th anniversary this year with circulation at an all-time high, and the magazine was recently nominated for the most prestigious prize in its field, the National Magazine Award For Excellence.

"Business week" is the only major business publication being nominated for general excellence and public interest awards. We're also beginning to make progress for the McGraw-Hill construction network providing customers with ubiquitous access to content is a key, strategic thrust for us, and there is no better recent example than the development of the McGraw-Hill Construction Network.

When this network was launched last fall, it fundamentally changed the flow of information to our customers. Before the transformation, we operated in these silos with dodge suites and the publications each focused on its own customers, silos, pure and simple.

Today, all of our content is consolidated into a unified set of information services, project, product, news, and information all flow into McGraw-Hill Construction network. There, the customers can select what they want and integrate it into their own workflow. The market response has been very positive since we shifted our focus from product sales to offering market solutions.

Our energy products continue to benefit from volatility in the oil and natural gas markets to position plats for more growth in international markets, we also opened offices -- are also opening offices very soon both in Russia and in China. We have also seen a modest pickup in advertising in the aviation market, and we also benefited in the first quarter from the Singapore air show. Summing up for information in media services, improving advertising picture, tight cost controls and an improved operating margin and those will stay in effect as we have said before until we can fully see the effect of the recovery in terms of our revenues, and we still plan to achieve high single digit and possible double-digit top-line growth in this segment for this year. So those are the operating segments. Let me sum up for the McGraw-Hill Companies, our guidance is on change.

We continue to project income from continuing operation to increase in the mid to high single digits in 2004 and of course, that's without the reoccurrence of the 30 cent after-tax benefit from the sale of our equity interest last year in Rock McGraw, and we're pleased with the start to the year, albeit the smallest year of the quarter. OK, before turning the presentation over to Bob Bahash, I have my paid commercial announcement coming up.

I have some information on our 2004 investor fact book, which is the pride and joy, as everybody knows, of Don Rubin and Celeste Hughes. It is now available, and it's ahead of schedule. It will be mailed shortly. If you want to see it immediately, you can do by going to the Web site.

You will find an electronic version of the 2004 investor fact book, 51 pages of new material of the McGraw-Hill companies and our key market, and in this version, you will find 110 links to Web sites for our products and services and as Don Rubin has said many times, you go to http://www.mcgraw-hill.com/investor_relations" www.mcgraw-hill.com/investor_relations you can get the fact book, and I know Don Rubin is excited for you to have it. Let's hear from Bob Bahash.

OK, thank you, . The corporations' financial position has never been stronger. We ended the first quarter with cash at 404m. First quarter decline from our year-end cash position of 696m and it's primarily the result of tax payments and the re-purchase of shares. A $190m US tax payment was made in March primarily relating to the sale of our 45% equity interest in Rock McGraw Inc. and we paid German taxes of 57m relating to a European restructuring that was completed a few years ago.

These German taxes will be credited against our US taxes. It was just a year ago that we had debt of 592m. Even though the company has a cash balance, we did have interest expense in the first quarter due to cash management and credit line fees and interest on deferred compensation. Also included in the interest area is that the recognition of deferred run expense from the Rock McGraw sale. I will touch on that in a minute. Interest expense was decreased actually 35% to 1.7m in the first quarter from 2.7m last year.

For the year, we expect net interest expense to be slightly below 10m. Now, in discussing interest expenses, let's step through the accounting for the Rock McGraw sale. This can serve as a reference point for the balance of the year. On December 29th, 2003, the company sold its 45% in Rock McGraw, inc. Proceeds were $832m. Also, prior to the sale in connection with its planned conversion to a REIT, Rock McGraw borrowed 175m and distributed those proceeds along with the cash balance totaling 230m to its shareholders.

At which McGraw-Hill received our 45% share totaling 104m. Now, consistent with sale leased back accounting, a portion of the pre-tax gain, or 212m, is being deferred and will be aim advertised over the remaining lease term of approximately 16 years as a reduction in rent expense. The reduction in rent expense is being pushed back to the operating segments in the form of an expense credit of 4.3m in the first quarter.

This credit is in the same proportion that the equity income from Rock McGraw ownership had been previously allocated. Now, sale lease back accounting requires that interest expense be accrued against the deferred gain and it is being reflected as interest expense in our financial statements.

In the first quarter, the interest expense associated with this accounting was 2.4m. The net effect of these items, which includes interest income from the cash generated from the sale of the building, the rent credit, as well as the interest expense resulting from the accounting treatment of our sale of our interest in Rock McGraw will be slightly in excess of one penny of delusion for the full year with virtually no impact on the first quarter. Corporate expense for the first quarter was 27.6m. The first quarter represents almost a 30% increase over 2003. Primarily due to increased vacant space and duplicate rent in connection with the consolidation of our UK offices and London's Canary Wharf leased facility. The cost of these actions came to three cents in the first quarter, as we have predicted.

As we previously estimated, we moved 800 employees in January from eight locations in London to a single location in order to achieve this consolidation. With regard to our 2004 effective tax rate, the company recently completed various federal, state, local and foreign tax audit cycles. This resulted in a one-time, non-cash benefit of $20m of accrued tax liabilities, or 10 cents a share.

That resulted in the overall effective tax rate for the first quarter coming in at 14.6%, which compares to 37% last year. Now, as we go forward, we anticipate returning to a blended tax rate of 37% for the remainder of the year. Now, let's look at our capital expenditures for the first quarter. They include capital expenditures for property and equipment, pre-publication investments and additions to technology projects.

Capital expenditures for property equipment in the first quarter increased 4.3m to 17.4m, which includes 6m for the completion of the Canary Wharf facility. For 2004, we anticipate capital expenditures to be in the range of 140m. Pre-publication investments for the first quarter totaled 36m, which is about 3m less than the same quarter last year.

This is primarily due to the projected weaker adoption opportunities in the k-12 market in 2004. However, as we go through the year's spending, we'll ramp up to reflect the significant opportunities in the k-12 market for the 2006 -- 2005 and '06 periods. For the current year, we plan to spend 290m. Additions to technology projects total 4.3m in the quarter, which is a decrease from 7.7m in 2003. For 2004, spending will come back up a bit and reach approximately 50m

The major technology projects is, of course, the global transformation project for the education segment, GTP, it was successfully launched in the first week of April at three school education units in the U.S., the McMillan McGraw-Hill, McGraw-Hill and Wright Group McGraw-Hill. This gives us a common North American platform and a cash processing system that encompasses order entry through revenue recognition, receivables management and customer payment. GTP will support the education segment's global growth objectives, provide technological enhancements to strength the infrastructure of manager information and customer service information and enable process and production improvements throughout the organization.

In the fall of 2004, we remain on schedule to add the remainder of the domestic school education group as well as higher education and professional publishing. We plan to complete the international units during the 2005-2006 period. At which time, we will begin to realize the benefits from implementing this system on a global basis. First quarter 2004 expenditures for GTP were 8.6m, which is a million higher than last year. The impact in operating profit for the quarter was 5.6m, 2m below last year.

We still anticipate total project expenditures at 180m. Now, let's review some non-cash items. Depreciation in the first quarter was 22.3m, a 1.1m increase over last year. Overall, we expect depreciation to decline by about 19% over last year reaching about 100m. Amortization and pre-publication costs of $32.7m, $1.1m increase compared to the first quarter of 2003. Amortization is projected at 260m for the year. This lower rate reflects this year's lighter k-12 adoption schedule.

Amortization of intangibles is relatively modest since we no longer aim advertise good will. For the first quarter, came in at about 7m. 1.8m decrease from last year, and we expect this category to be about 30m for the year. As you know, the company's focused on total shareholder return. In January, the board of directors increased the quarterly dividend 11.1% to 30 cents per share. We also expanded the range of our share buyback program and plan to purchase 3 to 5m shares during the year. The company has returned a total of 2.5b to shareholders through year-end 2003 with the payment of dividends and share re-purchases since 1996, which represents a compound annual growth rate of 11.7%. Finally in the first quarter of 2004, we stepped up our buyback. We purchased 1,566,800 shares for total of 193m at an average price of (inaudible) I will pass it back to Terry.

That's what the start of the year looks like. It's the smallest quarter of the year for us and it's dominated by the financial services side because of the seasonality of the education and the advertising side. Yet, we saw some strength and it was off to a little bit stronger start than we had anticipated. It's always nice to get off to a good start and again, the guidance is what we have said all along w that, let me go back to you, Don, and we'll go to your questions.

Thank you, Terry. So let's begin this morning and see if there are any questions in the room.

Doug Arthur, Morgan Stanley. My, condolences regarding Leo. Great leader. It's a big loss.

Thank you, Doug. I know you had a good relationship with Leo over those many years, and you know, I understand from where you're coming.

Terry, just moving to ratings for a second. Do you think the somewhat unexpected surge late in the quarter and there always is sort of a surge late in the quarter was any of that related to anticipation by, you know, corporate treasurers regarding higher rates later in the year so it may have pulled some financing forward, and then the testing area clearly is going to be a strength for you this year. Can you just help us size that market for you, how significant and what the growth rate could be for the next couple of years?

OK. Doug, the honest answer to the first question is really don't know. We'll get a better indication, you know, as we go forward in terms of, you know, size and some of the new issue dollar volumes especially in the struck For finance market and also in the high yield, but my guess is at this point, there might be some, but I think that would come from any anticipation about interest rate and you know speculation going up, and as you know, both in terms of the residential mortgage backed market and the high-yield market, they tend to show strength late in the quarter. So it's very much in keeping with what we expected.

As we have said all along, you know, we expect, just because of, you know, share supply and demand that we would see some slowing down of the residential mortgage backed market. We haven't seen it at all. It's a little bit surprising. It's stronger than anticipated, and it's continued right on into April. We're also starting to see a pickup, as I was saying in the asset-backed area as the consumer continues to, you know, really support the economy and push ahead. Both in terms of credit cards, student loans, auto loans and things like that. So I think that, you know, there is continued vent, but I think it's in keeping with the fact that in both of those areas particularly, residential, mortgage backed and high yield, they do tend to be at the other end -- I mean, at the end of the quarter and therefore, the March strength, you know, was very evident.

On the testing side, testing and reading first initiatives coming at especially out of the McGraw-Hill Learning Group are going to be the two factors that are he going to be very, very important this year given the softness of the allied adoption market. Testing, you know, is a very strong business. It's growing at double digits, and we'll l continue to do so, and I two--it has for some time. I believe that as we get into some of the, you know, the strength of some of the low stakes testing opportunities, as well as some of the mandated federal, you know, opportunities we're going to see more and more need, you know, to help prepare for the testing and therefore, the low stakes will get a benefit. Have we given market size?

No, we haven't.

It's a big number. It's a good-sized number on that part and it's growing very rapidly, and it should in terms of the opportunity that exists at this point and our position at this point.

Good morning, Condolences on Leo, as well. On the share buyback, the step-up in share buyback, will that result in a decline of shares for the year, or it will just absorb new issuance?

Ed, the share buyback that we have done in the past, when we're generally, between three and 3.5m shares, roughly 60% were used for programs, restricted shares, stock option, exercise, et cetera so assuming we do step up to a higher amount, there will be a larger percentage than 40% that would reduce the overall outstanding.

Another question, Terry, the big California bond issues coming up, will that tend to result in a lift in the market that would offset the slowdown taking place elsewhere, and the finance might end up for the year?

Yeah. I think that clearly will have, you know, a noticeable affect on the market. I think one of the remarkable things at this point is how quiet California is. You know, as we were preparing to come into 2004, all of the, you know, budget concerns and all of the political wrangling and all of that, California is very quiet and things have settled down and actually, in terms of some of the educational spending, some of the things that we're watching there, we're very encouraged by what we're seeing at this point, but there's no question that, you know, the size of the California, you know, bond issue is going to have an effect, without question.

And by the way, I would say as an aside, what we're also seeing from, you know, state budget and funding kinds of issues is a much quieter picture overall as many states are starting to find themselves in a little better condition than they anticipated they would be at this point, which is encouraging. Let's go to the telephone calls now.

Thank you. Our first question comes from Peter Appert with Goldman Sachs. You may ask your question.

Hi. Good morning. Let me ask two questions, if I could, please. Terry, is it possible to break out what portion of the somewhat better than expected first quarter revenue growth for the (inaudible) business came from No Child Left Behind or reading first money and then secondly, an unrelated question, maybe for Bob, it looks like the share count actually stepped up sequentially from the first quarter to the first despite pretty aggressive share re-purchase activity. I'm wondering if you've expended the scope or size of your option program and that might account for that.

OK. Peter, exactly right. You know, a lot of that activity and that was pretty good growth for the school education group for the first quarter at 8.6%. We are having very good success in the early childhood learning areas, open court continues to do very well. Everyday mathematics, impact mathematics continues to do very well.

We're also benefiting from some of the testing issues as people start to prepare for the federal mandate next year in both reading and math, and I believe that, and it's a little early to tell that the reading first activity that we have been talking about, the billion dollars that exist right now in the market clearly is starting to come through, and we've benefited from that. I think we will benefit more in the second and third quarters as people get ready for the new school year, but I think that, you know, clearly is that part, and on the share re-purchase, Bob?

Yeah, Peter, you're absolutely right. We actually had a very significant option exercise early in the year, as well as late in 2003, so the waiting of the timing of the stock option exercise is very early in January coupled with our buyback, which really was more in the March period affected the overall weighting of shares outstanding. You'll probably see that come down over the course of the year as we continue to step up our buy program and perhaps a slowdown a bit in terms of the option exercises.

OK. Terry, can I ask you a follow-up on the No Child Left Behind. The strength in the first quarter might suggest that the estimated 5% decline in full-year k-12 market size might be too pessimistic. How do you respond to that?

No. Again, you know, you really are talking about the strength of, you know, one overall adoption capability in all grades, which is math. The again, I see no changes in the adoption market. The new adoption market from the 525m that we talked about, so I think that from a market standpoint, that is going to, you know, probably be a pretty did number.

We'll see as we get into, you know, deeper into the second quarter and we'll be able to fine tune that a little bit, but I do expect for us, you know, that the reading first capabilities and our strength, you know, through the McGraw-Hill Learning Group and in all of the phases that takes on as well as the testing, it's going to be a nice component for us in 2004 and it's good to get off to a about start, and again, you know, the first quarter, you know, in comparisons are nice and those kinds of things, but it is a small quarter and it's just nice to see, you know that kind of participation starting to come in and we'll have to see that continue in the second. It will be reading first and testing moneys that are going to really help us on the high side. I will also say that, you know, the continued strength in the middle and the high school with Glenco (ph) and their leadership position is also going to be a factor, as well.

Great. Thank you.

You this, our next question comes from Kevin Gruneich with Bear Sterns. You may ask your question.

Thank you. Just going back to Peter's question. I guess, Terry, is it possible to isolate what revenue you got, at least an approximation from early reading first and from reading first and also from testing due to the mandatory federal requirements?

Yeah. Kevin, again, you know, it's very early on in terms of the data that we've got here, but where we're starting to see it is really on the early child had, which is some of the early reading moneys. We're seeing it in breakthrough to literacy. We're seeing it in open court. We're seeing it in everyday math, but it's really in some of the early reading that we're starting to see the initial components. We also think, though that parallel of that there's reading first moneys, you know, as well. Those are going to be the bigger dollars and those are the ones that we're going to want to watch and follow that trend, but the early childhood area that the bill -- the No Child Left Behind put so much emphasis on that seems to have educators, you know, focused more on that one initially. I'm sorry, Kevin, the other one was?

Was, if you could isolate what was coming from testing in the quarter. The testing due to mandatory federal requirements?

Yeah. The testing, you know, the testing dollars are coming from the states that we were talking about in the text. Those were quite strong in terms of the I Know assessment program and now the I Know progress in terms of the accounting for it and the valuation there. The area that we're watching and we're starting to see more pickup by states is in the, again, the low stakes assessment area.

That's the area that is going to be the bigger area and it is going to have the most, you know, growth prospects going forward for us. As people, you know, need to prepare for the higher stakes tests and there is more, you know, pushing it into the classroom where the teacher can do more diagnostic testing of their own students so it's those low stakes area that we put a lot of emphasis on and that's where we're starting to see it.

One quick follow-up. I was wondering if you could surface the top-line change for higher Ed sales and then for S&P and those services.

Sure. On the higher education, what is that, Bob? Bob is waving at me.

Higher education professional international.

Now I got that, Bob. I need higher Ed.

I appreciate that, Kevin, but we don't break that out, as you know. But I can give you a little color, Kevin. As you know, the segment was up 4.7%. Professional was impacted by the computer book sales. We started to see increased pickup especially in the business and economics area here and outside of the United States, but the higher education portion is, you know, is clearly the largest and is benefiting very nicely from the business and economics revision cycle that we're going through now and we anticipate that to, you know, be a good contributor for us all year.

And S&P info?

Again, we don't break out some of those components, but the areas of strength for us are clearly in some of the portfolio adviser, adviser insight and the portfolio and index services area, and again, I'm very pleased with the direction that the index services are taking on and the leadership position that we clearly have developed, but also, the strength of our ability, which wasn't the case back a ways, in terms of our product development and organic growth capabilities to keep developing these endless industries that can be, you know, converted into exchange traded funds and then, you know, a lot of permutations and in terms futures and options on them and so forth, and also the breadth of our capability in terms of S&P's global network, again, many some 32 locations around the world, in terms of being able to develop local markets more effectively, and so I think we're benefiting and we will continue to benefit from that.

Thank you.

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

Thanks. A couple of quick ones on the education space. If you look, for example, at the West Virginia deal. I want to get better color on the economics of different testing programs so a high stakes versus a custom or low stake in terms of kind of how they're sold per revenue fee, student revenue fee and you mentioned increased cost from some of the testing programs you had in the quarter. And I what tonight get a feel for what kinds of expenses go into it. Is it upfront or is it an ongoing expense? Just want to gauge how we should look at that testing market when you make an -- testing programs, how we think about the revenue impact and the return impact?

Brandon, there are multiple answers to your question in terms of developing the business model for testing. It's different by the category of tests that you are developing. Obviously, the majority of what we do is state focused, and the state under things like the No Child Left Behind are the ones that have the requirements for mandatory testing and therefore, in order to satisfy those, we work with them in terms of the development of high stakes tests to do it, and you know, revenue is driven, obviously, by factors of size and complexity, size clearly in terms of the number of students, the number of districts, the scoring implications and so forth.

So it would differ state by state, but it would be driven by the size of the student population and the scoring configuration. On the low stakes, there's multiple forms of low stakes testing. It could be by classroom. It could be, you know, driven by various teachers, principals or various administrators looking across the district at a particular theme, whether it be fourth grade reading or whether it be math comprehension or what have you, and again, it would be a function of, you know, the value that we would be providing to that.

It can also be an assessment, you know, tests associated with a particular instructional strategy in terms of a combining a certain capability. For example, in terms of some of what McGraw-Hill Learning Group is doing in terms of some of the research-based product, we may have an assessment component that, you know, that is combined with an open court reading or an everyday math configuration, and it would be a bundled price, but again, it would be a function on the size and the value that we would be providing with the tests.

OK, I appreciate the color. In a bit of a different direction, just so I understand how you guys are talking about the guidance for '04, the one-time tax issues here in Q1, is that included in what you're considering to be your recurring net income growth or should we exclude that 10 cent benefit from this quarter?

You should exclude that, Brandon. That was a one-time item. It was a 4-year cycle review on the federal side, local and state, as well as international was different, but from the federal side, it was a four-year review and resulted in freeing up a $20m of tax liabilities non cash item, but it's a one-time event. So the go-forward effective tax rate would be 37%, which is similar to what we used last year.

Perfect. One final one. Terry, there's been some talk recently or more so last year than this year, about states looking at the testing requirements and saying we don't have the money to make these mandates fully go through. You talked about a $390m number. How do you view that situation these days? You mentioned states are in a bit better shape. Is there more or less pushback from states talking about how much they have to do in the next three or four years on the testing side given where they are financially?

Certainly, we'll have to see that as we get closer to, you know, next year and in terms of some of the mandatory testing requirements. Right now, and you know, it's hard to make it as a trend, but what we're seeing is that most states, you know, have a much more favorable condition in terms of their funding practice than they had anticipated at this point. Yet, I think that, in terms of the supplementing to the 390m coming from the federal government, you probably are he doing to see multiple schemes in terms of how to pay for that, but again, if you are under if you accepted, you know, federal funds, you are going to be held accountable to federal standards and therefore, you're going to be held accountable to the federal mandate for testing.

OK, thanks a lot. I appreciate it.

Thank you. Our next question comes from Dave Lewis with J.P. Morgan. You may ask your question.

Hello, it's Unidentified here at J.P. Morgan. Good morning. My condolences on Mr. O'Neill. A couple of questions for you. Terry, first, can you give us how much RMDS was in the first quarter as a percent of financial services? And can you also then give us a, you know, a sense of where you think you're positioned in testing market leader, kind of market share and then just finally touch upon the trend toward one of your competitors announced an electronic textbook publishing. Where do you think -- what your efforts are there and how you think that will shake out for margins given the reduced cost for solicitous revenues?

OK. Let's start with residential mortgage backed. Residential mortgage backed, you know, has been overall within the structured finance market a smaller portion of the overall mortgage backed security area. Obviously, the size and complexity of some of the commercial mortgage backed markets, you know, area has been the bigger component.

In terms of growth rates and in terms of participation in 2003 coming into 2004, it was the residential mortgage backed market that has been so hot, and therefore, we've had higher growth, you know, coming from the residential mortgage-backed market, and again, it surprised us a little bit in March because we expected some slowdown on that one, and obviously, it continued at a very strong rate and continued that way into April, but it is the smaller portion of the overall market.

The mortgage-backed market is, you know, it's a very big component, but the asset backed market within structured finance is even bigger, and the encouraging sign there is strength that we started to see resume once again on that side, and again, that's student loans and credit card receivables with consumer debt going higher and auto loans and the like. On the testing, was the question relative to competitors and our market share size?

On the testing, just do you think you're the leader? If you can give me rough numbers on your market share and how much you expect to capture of these incremental dollars.

Without question, you know, we have, you know, the educational testing brand in CTB/McGraw-Hill. From a share position, we are one of the, you know, major participants of the major three educational test publishers on that one. We have representation now and I'm guessing and I'm looking at you, Bob, about 22, 23 states out of the 50.

You know, those would be the largest states, those with adoption capabilities, state adoption capabilities and the like, so there is a lot of room for growth, not only from the federal mandates but also in terms of a lot of the state requirements and the ability to, you know, assess student achievement and so we will continue to be expanding out on that state network from that standpoint, and I presume competitively, so, too, will our other markets, but we're in roughly 22 states now.

Those are the bigger states and you'll see that continue to grow as the low stakes testing initiative becomes more, increasingly more important, and you're going to see a lot more push in terms of on-line product, you know, development. Very much like the programs that we have developed with the I Know series on that one. Electronic textbook, you know, it's an interesting one I think that you know again whether you are talking about at the higher education level or if you are talking at all the way down to the pre-K, early childhood area, you know, there's an awful lot of on-line support and on-line capabilities that we have in terms of being able to address alternative learning or being able to have more cost-effective, you know, products in the schools.

One of the things that, you know, we have seen in terms of what I think you're referring to as one company has talked about providing electronic version at a reduced -- substantially reduced price, and is that most students want a hard copy even though, we provide an election --electronic version that a student can download, we have not seen, you know, an overwhelming response, you know to the electronic version of the textbook that most people want it in a print form on that one and therefore, what we have spent a good deal of our efforts on is developing companion networks, support networks for our text that help not only the student but the instructor as well in terms of alternative materials and alternative learning, you know, capabilities, but it's one that we watch very carefully. We just have not seen an overwhelming response to the desire to have an electronic textbook.

Thank you, gentlemen.

Thank you and at this time, that was our final question and we would like to turn the call back over to Mr. McGraw for closing statements.

Go ahead, Doug.

... was almost $500m of net cash and it's the strongest balance sheet that this company had probably in 20 years, I suspect. Certain businesses you're in, you're pretty much as big as you can get, such as high and ratings, certain businesses, such as areas of information and media, you're probably not optimal m terms of potential tuck-ins, what might be a priority wish list?

OK. Doug, you know, the strength of Standard & Poor's, the strength of McGraw-Hill Education and our intermediary I think give us enormous opportunities for growth. Taking each one separately, Standard & Poor's is about 32 years into a 70, 75-year market transformation away from banks to the capital markets. And I believe that, you know, our growth over the last, you know, couple of decades has been very significant in keeping with the current market demand to forward those kinds of changes. I think we're going to see some tremendous representation, especially outside of the United States.

You know, just with, you know, the rating size, we're about 35% of our business is coming from outside of the United States. My guess it's going to approach by 2008, 2010, somewhere in there, 50%, and it's going to go even higher. We're seeing a lot more participation in the Asian markets, Latin-American markets, you know, a little surprisingly, have been stronger, but also obviously in Europe, and so I believe that in terms of, you know, all of the things that help in terms of transparency, both on the equity and on the fixed income side, I think we have, you know, enormous, you know, growth opportunities to go.

The education one is a very intriguing one. I believe we're just at the beginning of a major market transformation. When people talk about wage gaps and wealth gaps and especially in this country, you know you see a division between professional workers who are higher-waged earners because they're in jobs that require a lot more education and continuing learning, things like doctors and lawyers and managers and consultants and all sorts of things that way, and then you've got, you know, on the other side, the personal service workers, people in the restaurant business, retail and all of those kinds of things. When we started to see a lot of the displacement in terms of jobs through productivity in all of that the supply of labor for those kinds of jobs is extremely high, and therefore, the demand on wages is very low. And therefore, you get this widening gap within the country.

I believe it is a learning gap. It is not, you know, the wage gap is, you know, the immediate manifestation, but I think it's a learning gap. What you know is what is important now for you to be competitive and you to get into the higher education jobs. One of the biggest falloffs that we have seen in the last three years is in that 16 to 24-year-old category because, you know, more workers are available and have had more experience and people are going to take more of an opportunity to tap into them, and therefore, what I believe we're beginning to see is not just in the traditional education marketplace, but there is an enormous opportunity here and around the world in terms of all kinds of learning and training and those capabilities, and I think this opens up a huge opportunity for us, you know, to be able to really make a broader difference.

We're not entitled to that space. It's not going to be just the traditional educational, but I think there's going to be --and I think you have seen it in some of the for-profit schools, some of the for-profit instruction material. You have seen, you know, tremendous growth in some of those areas. And therefore, I think that here and abroad, we're going to have this ability to look into more and more ways to address learning both on an adult level as well as a very young student.

On the advertising side and on some of the business-to-business information area, we're looking for targeted, you know, tuck-in acquisitions that will help us support the continued growth in terms of some of those construction platforms, energy platforms in particular, and we will see a lot more activity in some of the large industrialized countries like Russia and China that we're developing there. Acquisitions will be very important to us, but what we're talking about are those that have support existing core growth areas and you know, those are why we call those tuck-ins on that part, so I am very encouraged. I thank you for the comments on the balance sheet.

It's probably more than 20 years, Doug, and I give Bob and his financial team tremendous credit for the tightness of our controls even are complaint with Sarbanes-Oxley 404 and you know, we just have a very, very strong financial team, and we pay a lot of attention to balance sheet and our cash flow and our share of returns on that part. I think we have worked hard to be in this position, and it gives us a lot of flexibility, you know to work out on the growth. Sorry for the longer answer. That end our conference. Again, it's a good start to the year. It is a smallest part of the year and we need to see the continuation of that kind of progress, and I thank you all for your attention and interest in McGraw-Hill. Thanks.

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