標普全球 (SPGI) 2004 Q2 法說會逐字稿

Good morning, and welcome to the McGraw Hill Company's second quarter 2004 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 a 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 a presenter's site available on the internet. To do that, go to http://www.mymeetings.com/nc/join. I will repeat the URL address one more time for those who would like to view the presenter's slide online. It is: Http://www.my meetings.com/nc/join. You will be prompted to enter your name. The net conference meeting number is P as in Paul, G as in good, 5562662. The password is McGraw Hill, all caps with a space between McGraw and Hill. And the event type is conference.

This call is also being simultaneously webcast from McGraw Hill's investor relations website, 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 and zero, and I will assist you momentarily. I will now like to turn the conference over to Donald Rubin, Senior Vice President-Investor Relations of McGraw Hill Companies. Sir, you may begin.

Thank you , and good morning. Thank everyone for joining us from here and abroad at the McGraw Hill headquarters building, on the phone and on the web for this morning's announcement of the McGraw Hill Company's second quarter 2004 earnings.

I'm Donald Rubin, Senior Vice President-Investor Relations of the McGraw Hill Companies. With me today are Harold McGraw, III, our Chairman, President and CEO; and Robert Bahash, Executive Vice President and Chief Financial Officer of the corporation. This morning, we issued a new release with our second quarter 2004 results. We trust you all have a chance to review that release. If you need a copy of it and the financial schedules, they can be downloaded at www.mcgraw-hill.com/investor_relations. That's www.mcgraw-hill.com/investor_relations.

Before we begin this morning, 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 meanings of the Private Securities Litigation Reform Act of 1995, including projections, estimates and the descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements.

In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission. We are aware that we do have some media representatives with us on the call. However, this call is for investors, and we'd ask that questions from the media be directed to Mr. Steve Weiss in our New York office at 212-512-2247, subsequent to this call. Today's update will last approximately an hour. After our presentations, we will open the meeting to question and answers.

And it's now my pleasure to introduce the Chairman, President and CEO of the McGraw Hill Company,Terry McGraw.

Harold McGraw, III: Okay, thank you very much, John. And good morning to all of you, and it's nice to have you here. And if you're listening in, we welcome you as well, and thank you for your interest in the McGraw Hill Company.

This morning, we are very pleased to review with you the second quarter results, which as Don said, we released just a few hours ago. Also, Bob Bahash, our Executive Vice President and Chief Financial Officer, is with us; and after my presentation, Bob will give you some of the key financial implications, and then we will go with any direction that you would like, in terms of questions.

Let me start by briefly recapping our second quarter performance. Diluted earnings per share from continuing operations increased 14.7% to 86 cents. Net income from continuing operations grew by 16% to $165.6 million. And revenue increased by 5% to $1.2 billion. And the overall operating margin improved to 24.1%. A obviously very solid quarter and an excellent first half that was also, obviously, somewhat stronger than we originally had anticipated. As a result, we are refining our earnings guidance for the year.

Our earlier forecast called for mid to high single digit growth in earnings per share from continuing operations for 2004, and that's without the reoccurrence of the 30-cent after tax benefit from the sale of the equity interest in Rock McGraw. And we now expect high single digit growth in earnings per share from continuing operations for 2004 -- and again, without the reoccurrence of that 30-cent after tax benefit. As we look ahead, the economic picture looks quite bright.

Our chief economist, David Weiss, Standard and Poors, sees a stronger second half, with gross domestic [INAUDIBLE] product growing at about 4 1/2%, and will probably be a little higher than that on a full year basis. We've seen the federal reserve start to increase interest rates. The timing of the next rate hike is not so clear. Still, we expect to see the feds boost rates to about 2% by the end of the year. We also believe that ultimately we are heading for a 4% rate, probably by early 2006 -- and obviously, that is still very low by historical standards, but in line. A 4% rate by early 2006, that would be about 2 percentage points above the core inflation rate or above 1 percentage point below nominal GBP, which is all in keeping in averages.

Inflation is at 1.9% -- it's up from 1.1 at the end of last year. Capital spending for equipment, a very important indicator in our advertising market, is growing at 13%, and unemployment is holding at 5.6%, and should decline a little bit further by year end. Importantly, we are seeing more encouraging economic news from the states.

The National Conference of State Legislatures recently released survey shows better economic conditions at the state level. With some help from the federal government, states have closed budget gaps and increased year end balances for the fiscal year just ended. The outlook for state spending on education is improving as the new fiscal year gets under way. And it comes at an awfully good time, as we prepare for a much stronger K-12 market in 2005 and beyond.

For the fiscal year 2005, which began on July 1 for most states, general funding for K-12 education is budgeted to grow at 4.9%. It's at 5.1% when total state funding is factored in. The increase last year was 3%. General fund support for higher education is budgeted to grow at 3.2%, and that would be 3.1 when total state funds are considered, and that compares with a drop of 0.6% last year. These figures are based on a survey of 44 states. Six states, including New York and California, are not represented because they haven't passed their budgets -- although I heard some news this morning that there is a handshake agreement with a California governor, and we might have a budget there. Still, the news for education is very encouraging.

With that, let me turn to our operating segments, and let's start our review of operations with a look at McGraw Hill Education. At McGraw Hill Education, in the second quarter, revenue was off 2.1%. Operating profit grew by 2.6 and the operating margin improved to 10.7. In the McGraw Hill higher education international and professional group, revenue for the second quarter grew by 7.2%, and is up 6% for the first half of the year. In the McGraw Hill school education group, revenue was off 6.7% for the second quarter. And it is down 3% for the first half.

Now I'd like to underscore those first half results, because in both instances our performance is better than that of the industry. According to sales figures from the Association of American Publishers, AAP, the L-high market is down 3.6% for six months, and we still expect the L-high market probably to decline by about 5% this year, and we still expect to do better than the market.

In the college and university market, the AAP report sales are up .9 of 1% in the first half. Our higher education products are bidding the industry after six-months and we still expect the market to grow somewhere in the 2 to 3% range in the 2004, and we still expect to outperform it. Now let's take a closer look at each of those groups.

McGraw Hill school education group's second quarter performance was influenced, obviously, by the timing of orders, reduced opportunities in the state new adoption market this year and the award of a $20 million order last year from New York City for math programs. Last year, Texas and other adoption states started placing orders for the social studies adoption in the second quarter. This year, Texas is buying later and is purchasing substantially less. Biology and ESL products for three grades won't nearly make up for the social studies and early childhood orders from Texas last year.

The reduced opportunity in Texas is just one of the key reasons the whole new adoption market this year is going to shrink by about 30%. Math is this year's major adoption opportunity. But it's about 25% smaller than the 2003 social studies adoption. We took about 30% of the social studies adoption last year; and the good news is that we expect to lead the K-12 math market this year with a better than 30% capture rate.

Because math is not a one size fit all market, our strategy has been to offer a diverse lineup of products. In 2004, they include Every Day Mathematics, which has grown into the nation's leading research-based math program; Growing with Mathematics, an innovative program for the early grades; McMillan Math, our core basil for the K-6 market; Mathematics, Applications in Concepts and Pre-algebra for the middle school market; and new editions for the high school market, including Glencoe Algebra One and Two, Geometry and Advanced Math Concepts.

With such breadth and depth, we were very successful, even though our K-6 basil program didn't meet our expectations. There's another important factor in our performance this year -- our strong success at the secondary level, which is the largest part of this year's math market. In Reading and Testing, we are benefiting from No Child Left Behind funding. In California, for example, major districts like Los Angeles and Oakland used Reading First funds to purchase Open Port reading in the second quarter.

We expect more Reading First business in the third quarter, but it's still the wild card in this year's market, but it is being spent. No Child Left Behind Act has been in the news a lot recently with a national election going on. But despite some controversy, this program, with its emphasis on early childhood education, urban markets, assessment and accountability is here to stay. And the programs that are most important to educational publishers, reading and testing, are fully funded.

Now let's take a look a little further at Reading First. We know that it's a 6-year program, and that the first three years are already funded. States have received funds for the first two years; 900 million for the first year, 943 million for the second year. Funds for the third year of the program will be released to the states later this year, probably in October. And year 3 funding is at $1 billion. Now, states have 27 months to obligate each year's funds. Now, obligate. Now, that's one of those bureaucratic terms for making a commitment to spend money. They have up to 48 months after making that commitment to actually pay bills.

Now the 27th-month deadline for obligating the first year's Reading First fund hits this September. Our own research shows that there are 3,600 eligible school districts for Reading First fund. At the end of June, we know that all of the states have released their first year funds to local education agencies. At the same time, we know that 26 states have released second year funding to local education agencies, and we believe a lot of the funds are being spent on reading coaches, the professional training of teachers; but Reading First districts are also buying instrumental material.

The allocation of funds we laid out in the 2004 Investor Fact Book is very valid. But we still can't predict just how much we will be spent this year, but it's clearly being spent. The states are making progress on key policy issues. The Education Commission of States recently issued a major report on how states are implementing No Child Left Behind. They studied forty No Child Left Behind requirements, ranging from standards and assessments to teacher quality and adequate yearly progress.

The Education Commission says all but two states and the District of Columbia have met or are partially on track to meet 75% of the requirement. Earlier, I was talking about a pickup in our testing business, as states prepare for the mandated testing of children in grades 3 through 8 in reading and in math. That's a No Child Left Behind requirement for the 2005, 2006 school year. Increased focus on measurement and accountability is a key reason why we acquired the grow network earlier this month. As a result of No Child Left Behind, state and school districts have significant data reporting requirement.

The GROW network already has the ability to transform quickly large scale state and district results -- a lot of data -- into customized reports in print and on the web, specifically for students, parents, as well as for educators. The reports are user friendly, and can help teachers use the data more effectively to guide instruction. Started in 2000, GROW has already developed a diverse customer base of states and major school districts from coast-to-coast. It is in an excellent position to service this rapidly growing market for reporting test results and what to do once you get those results, in terms of being able to grasp the material, and we are pleased to have this important new capability part of McGraw Hill Education.

Let's turn over to the higher education, professional and international publishing group. That group produced 43% of the segment's first half revenue. Our higher education products are selling very well worldwide. In the United States, this is going to be a big year for our business and economic pipes as we market new editions of some of our classics.. Yearly reports are very encouraging. Three major new titles this year, including McConnell's Economics -- that's the 16 edition of that text -- Nickels Understanding Business, its 7th edition, and Larson's Financial Accounting Principles, in its 17th edition.

We were also encouraged by our progress this year in international markets, both in our Spanish and our English language sales. We are seeing some strong performance in Latin America, especially in Mexico and in Argentina, and Spain as well, particularly in the school market. We continue to add new technology-based subscription products.

Our latest is called USML Easy, an online medical assessment and test prep service. Medical students preparing to take board exams are finding this product very helpful. The lineup of technology-driven products sold by subscription are going to grow at McGraw Hill Education, creating a new revenue stream and adding a new dimension to the portfolio, and you will be hearing more from us about these developments.

Coming up for the McGraw Hill Education group, we expect to outperform the online market this year, which may be off again by about 5%. No Child Left Behind funds are in the market. States are healthier than originally anticipated. We expect to outperform the college market, which we expect to grow in the 2 to 3% range. And we expect more growth in international markets.

Okay, with that, let's turn over to McGraw Hill financial services. For the second quarter, revenue grew by 14.8%. Operating profit increased by 24.9%. And the operating margin was 42.5%. Clearly, Standard and Poors is off to a strong start in 2004. And is well along in meeting the double-digit top and bottom line increase that we have forecasted this year. We also expect to at least match the operating margin achieved in 2003.

We said coming in that we would like to match the operating margin 2003, and I would tell you now that we expect to at least match that number. S&P produced a record second quarter performance, even though new issue volume in the U.S. bond market declined by 8.7%. We believe that S&P's results underscore once again that our market is bigger, broader, more global and more resilient than some observers may realize.

S&P continues to benefit from the broad and growing array of products and services that it has created over the years. As a result, there was stronger growth in international ratings. Over seas markets now represent about a third of our ratings revenue and are growing faster than our domestic markets. I would also say to you that as we are entering in probably the 32nd year of like a 75-year trend in the growth of our global capital market, we are going to see this situation continue probably into 2008, 2009 period, somewhere around there.

You will probably see our ratings revenues about 50% coming from outside the United States, and after that it will flip, and most will be coming outside. There was also strong growth in our bank loan ratings, especially in Europe, counter party and financial strength ratings, and also rating evaluation services. These products continue to grow more rapidly than many of our traditional ratings. There is also growing on-line -- ongoing revenue, rather -- revenue streams created by our annual contract and surveillance fees.

And again, approximately 55 to 60% of our revenue stream in ratings is not tied to transaction; and clearly, this portion of the business is less interest rate expensive. That is a key factor in the resiliency that Standard and Poors has achieved, and another reason why the business model works so well. Structured finance was strong globally in the second quarter, with growth in all asset classes. The first half strength of the residential mortgage backed securities market clearly outstripped earlier expectations.

Strong refinancing levels, robust existing home sales and higher new housing starts all contributed to the growth of the residential mortgage backed security issuance in the United States -- and by the way, the housing data that we saw yesterday also remains quite strong, stronger than anticipated. As interest rates started to rise, borrowers also took advantage of adjustable rate mortgages to finance home purchases. Asset backed securities issuances picked up in the final six weeks of the quarter, as credit card and auto issuers entered the market. S&P's success in structured finance is also reflected in market penetration measurement.

In the first half, Standard and Poors improved its market penetration, measured either by dollar volume or by the number of issues rated. In the United States, structured finance market S&P rated 96% of the dollar volume issued in the first half of 2004 versus 94% last year. In the European structured market, S&P rated 86% of the dollar volume issued in the first half this year versus 78% for the comparable period last year.

These figures include residential mortgage backed security, commercial mortgage backed securities, asset backed securities, and collateralized debt obligations -- CDOs. And they make Standard and Poors' market leading position unmistakably clear. The statistics come from Harrison Scott data. In the corporate market, issuance in Europe and high yield activity early in the second quarter were offset -- were offsets to declining investment grade activity in the United States, and the public finance market was also soft.

In looking ahead, we expect growth to moderate somewhat in the second half. still The pipeline for residential mortgage backed securities looked pretty good at the start of the third quarter. But overall issuance is going to start to slow at some point in this third quarter. The year over year comparisons in this market are more challenging in the second half. In 2003, the U.S. residential mortgage backed security new issue dollar volume soared by nearly 50% in the second half. And so we don't expect to see that rate of gain this year in the second half; albeit, it will be strong. U.S. corporate issuance was also strong last year in the second half. Growing by nearly 40%.

Year over year improvement is unlikely, and we don't expect growth in the public finance market this year -- again, given to some of the health in terms of the state issues. But this is not the whole story. The international ratings market will continue to be a source of very strong growth for us. And it will also be a source of strength in our bank loan ratings and other nontraditional products, which now account for about 20% of our ratings revenue. We also expect the asset backed market to grow more strongly in the second half, and there are other factors that will contribute to our second half performance and help mitigate a slow down in the new issuance market.

Starting in August, S&P will begin to realize incremental revenue for independent research that it will provide to Wall Street firms as a result of the global settlement mandated by the New York attorney general and the FCC. Standard and Poors has a leading share of this new market. S&P is the core provider of independent research to Goldman Sachs, Citi Group Smith Barney, Morgan Stanley, Credit Swiss First Boston and Piper Jaffray, and our material is also available on the Bank of New York Jaywalk [PHONETIC] platform.

The global settlement firms all went live yesterday with independent research for their customers. The appetite for independent equity research is not limited to the settlement firms. We are winning new business at nonsettlement firms. H&R Block recently licensed S&P's Equity, a mutual fund research, for its 1,200 financial advisers. Legg Mason, Vanguard Brokerage and USAA also recently selected S&P Equity Research for their clients.

We are pursuing new opportunities overseas. UFJ Bank, one of Japan's top four banking institutions, will provide S&P research to clients and advisers throughout its USJ security subsidiaries and there are more deals in the pipeline. Fees based on assets under management for exchange traded funds, based on S&P Industries, continue to grow. At the end of June, there was 90.1 billion in S&P-based exchange traded funds, a year over year increase of 25.4%. Incredible number.

It continued to add to our lineup of index products and services and attract new customers. Our new broad-based S&P Citi Group indexes acquired last November are gaining new custom index clients, including State Street, Franklin Templeton, Goldman Sachs, Charles Schwab and the Canadian Pension Plan, the nation's equivalent of social security, and we're also starting to make data sales there as well.

We are launching other new indexes that are also attracting assets. For example, we created an investable hedge fund index, which is managed by Plus funds. The hedge fund index, the trade market thinks, now has 2.3 billion under management. We're also expecting more growth in our financial information products and services, including now newly reformatted S&P stock reports.

Finally, let me provide you with an update on the regulatory scene. As you know, Standard and Poors has been active in gauging legislative and regulatory institutions here and abroad in productive dialogue. A good deal of attention is now focused on the International Organization of Security Commission. That is IOSCO, for short. Last September, IOSCO issued a statement of principles regarding the activities of credit rating agencies, and recently followed up with a draft of a code for rating agencies.

The draft is labeled "essentials of a code of conduct regarding the activities of rating agencies". The FCC's Office of International Affairs is involved in the formulation of this code and has asked the rating agencies to comment on this draft. The FCC has asked for our response by August 16th, and we are in the process of carefully reviewing that draft code. In general, the proposed draft is consistent with existing and longstanding policies and procedures followed by Standard and Poors. After comments are received, IOSCO, by early Fall, is expected to circulate a revised draft for public comment.

We understand IOSCO wants to issue a final code no later than November. Clearly, the dialogue continues; and we continue to believe that any proposals will not have a material adverse impact on S&P's business activities or future growth opportunity. I also want to point out that Standard and Poors is preparing its own code of business practices that will also be made public. It represents a compilation of S&P's policies and procedures, and will underscore the fact that our existing policies are already consistent with the IOSCO principles.

So let's sum up for financial services a very strong second quarter, a very strong first half; moderating growth in this second half against tougher comparisons, incremental growth for independent equity research and continued expansion of our indices. Also, double digit top and bottom line growth for the year, and operating margins that at least match last year's. And finally, taking a look at our information in the media services segment, for the second quarter, revenue increased by 2.5%. Operating profits were up 1.6, and the operating margin was 12.8. Improvement in advertising helped the segment move ahead.

And an increase in local time sales and political advertising were important factors in the 3.5% revenue increase at broadcasting. Retail, automotive and service advertising contributed to the growth. The governor's race in Indiana and the presidential campaign in Colorado amounted for much of the upsurge in the second quarter political advertising. As the elections got -- you know, will get nearer, we will see more from the race from the mayor in San Diego, the contest for the Senate seat in Colorado, and the propositions in California.

Currently, there are 14 propositions that have qualified for the ballot in California. Right now, we are pacing ahead by 4% in the third quarter. One factor is the summer Olympics, which will be broadcast in August on a rival network. Revenue increased by 2.3% in the business to business group, which consists of Business Week, construction, energy, aviation and health care. It was a good quarter for Business Week. After a 2.6% increase in advertising pages in the first quarter -- that's with January being off, February being off, and the surge that we saw that we reported last time in March -- Business Week produced a 14.6% gain in the second quarter, despite one less issue. and that's according to the Publisher Information Bureau.

Business Week continues to attract new advertisers. Adding more than 130 so far this year. In a few days, Business Week will file its latest circulation statement with the Audit Bureau of Circulation, ABC. And we're in very good shape there. Business Week has a history of very clean audits. In the last five years, Business Week's average audit variance was only .3 of 1%. The latest ABC audit will show a very positive pickup of 200 copies.

This is a serious business, and we are committed to maintaining this record of delivering on what we promise. The quality of our editorial product continues to gain new recognition. The LOBE [PHONETIC] from UCLA's Anderson School of Business, is widely recognized as a leading prize in business journalism. This year, it was awarded to Business Week for two stories. One is "Your Job Next". And the other, "The Rise of India. Business Week staffers who won the prize were Pete Enguardio [PHONETIC], Vangeit Lonnie [PHONETIC] and Erin Bernstein. Last month, we also successfully launched Business Week's Small Biz, a new controlled circulation publication for 500,000 small business entrepreneurs and owners. The next edition will be published in October.

We are still encouraged by the outlook for advertising in the second half. Through the issue of July 26th, we are ahead for the year now by 6.5%, even after a decline of 13.8% for four issues this month. But we should see a pickup starting next month, and we expect it to build into September. We also saw softness in advertising in some our construction publications, but Architectural Record, in June, published the second largest edition in its 113th year history. It included 294 pages of advertising. That performance, coupled with more progress at McGraw Hill Construction Network, offset the softness.

Our energy services benefited from the growth of our oil industry information product, and advertising was also soft in our aviation and health care area. Summing up for the outlook for information media services, circulation remains strong at Business Week. We expect the ad recovery to continue at Business Week; broadcasting will benefit from pickup in political advertising; continuation of tight cost controls; and an improved bottom line and margin expansion.

Okay. That completes the review of our three operating segments. In summing up for the corporation, I will reiterate our guidance again: We now expect high single-digit growth from earnings per share from continuing operations -- and that's, of course, without the reoccurance of the 30-cent after tax benefit from the sale of the equity interest of McGraw Hill.

With that, let me turn it over to Bob, and then we will go on to your questions and go in any direction that you would like.

Okay, thank you, Terry. Improving total shareholder return has always been one of the objectives over the real companies. In January of 2004, the board directors increased the quarterly dividend 11.1%, and expanded the range of our share buy-back program. While we're well on our way to meeting our new goal of buying back 3 to 5 million shares in 2004, in the second quarter, we purchased 1,485,000 shares, for a total of 115 million, at an average price of $77.28 per share.

For the first six-months, we have now purchased 3,052,100 shares for 234 million. Between 1996 and June 2004, the company has returned a total of 2.9 billion to shareholders with the payment of dividends share repurchases. As a result of the share repurchases and substantial tax payments in the first quarter, [INAUDIBLE] I'll describe in a minute, we ended the second quarter with cash at $384 million, which is down from $404 million at the end of the first quarter and $696 million at the end of 2003. The tax payments included a $190 million U.S. tax payment in March, primarily relating to the sale of our 45% equity interest at Rock McGraw, Inc. We also made deferred foreign tax payments of $57 million relating to a European restructuring completed a few years ago. These foreign taxes will be credited against U.S. taxes.

Just a year ago, we had debt of $533 million. As a result, our interest expense has declined significantly. Interest expense decreased 19.2% to $2.2 million in the second quarter of 2004 from $2.7 million last year. For the year, net interest expense will be slightly below $10 million. Now we continue to have interest expense despite a cash balance, due to cash management and credit line fees, and interest on deferred compensation. Also included is the non-cash interest related to the recognition of the deferred rent credit from the Rock McGraw sale.

In discussing interest expense in April's first quarter earnings call, I stepped through the sale lease back accounting from the Rock McGraw sale that occurred in December of 2003. I will just give you the relevant second quarter figures this morning. In the first quarter call, I mentioned that the reduction of rate expense was being pushed back to the operating segments in the form of an expense credit in the same proportion that the equity income from the Rock McGraw ownership had previously been allocated. For the second quarter of 2004, this credit is $4.3 million. We also mentioned the interest expenses accrued against the deferred rent credit and is being reflected as interest expense in our financial statements.

In the second quarter of 2004, the interest expense associated with this accounting is $2.4 million. Corporate expense for the second quarter was $31 million, a 39.2% increase over 2003. It's primarily due to increased vacant space, which is retained for future needs; duplicate rent in connection with the consolidation of our U.K. offices in London's Canary Wharf lease facility; as well as expenses relating to professional fees for various corporate initiatives.

With regard to our 2004 effective tax rate, we returned to an effective tax rate of 37% for the second quarter, and anticipate maintaining that rate for the remainder of the year. The return to 37% follows a reduction in the effective tax rate for the first quarter of 2004, which was 14.6%. This reduction was the result of a first quarter non-cash benefit from a $20 million reversal of accrued tax liabilities, or 10 cents per share in the first quarter, as we completed various federal, state local and foreign tax cycles.

Now let's look at our capital expenditures for the second quarter. They include capital expenditures for property and equipment, free publication investments and additions to technology projects. Capital expenditures for property and equipment in the second quarter decreased $6 million to $21.6 million, and include $1.6 million for the completion of the Canary Wharf facility.

For 2004, we anticipate capital expenditures to be in the range of $140 million. The publication investments for the second quarter totalled $69 million, $18 million higher than the same quarter last year. For the full year, we now expect to spend approximately $260 million, which is down from our last estimate of $290 million, but still greater than last year as we ramp up for the K-12 market adoption schedule for 2005, 2006, and beyond. Additions to technology projects totalled $2.3 million in the second quarter of 2004, which is a decrease of $5 million from a year ago.

Spending in the second half of 2004 will pick up, but we're trimming our original forecast of $50 million to $40 million. The major technology project is the Global Transformation Project, the GTP, which supports the education segment's global growth objectives. As we previously stated, GTP enables process and production improvements throughout the McGraw Hill organization and provides a common North American platform. GTP's order to cash processing system encompasses order entry through revenue recognition, receivables management and customer payments.

It was successfully launched in April of 2004 at three school education group units in the United States, and is on schedule to win remainder of the domestic school education businesses, as well as higher education and professional publishing this fall. 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. Second quarter, 2004, capital expenditures for GTP were $5.6 million, which is $8 million lower than last year. The impact on operating profit for the second quarter was $4.7 million, or $3 million less than last year. We still anticipate total project expenditures at $180 million.

Now let's review some non-cash items. Depreciation in the second quarter was $23 million compared to $21 million a year ago. Overall, depreciation will be about 19% higher than last year, and we're expecting $100 million for 2004. Amortization of prepublication cost was $72 million in the second quarter, a$3 million increase compared to the second quarter of 2003. And amortization is projected, as I mentioned, at $260 million for 2004. Amortization of intangibles is relatively modest, since we no longer amortize goodwill. For the second quarter of 2004 it was $7 million, a $2 million decrease from last year. And for the year, we expect to spend $30 million. Thank you, and now back to Terry.

Harold McGraw, III: Okay, thank you, Bob. And, Don, we have copies of all the slides, correct?

They are available, yes. They will be available for everybody.

Harold McGraw, III: Okay. That completes the first half of the year. Hard to believe. And all of that, one-half to go. And that wasn't but a very encouraging picture. Let's go to your questions. And Don, do you want to -- ?

Yes, thanks. Just a couple of instructions for our guests here in the room. Please use the microphone when asking your question so that our phone participants can also hear the questions. Like you to state your name and your company affiliation. You may signal Sam when you have a question so he can bring the microphone to you.

For our phone participants, please press star 1, indicating that you wish to enter the queue to ask a question. To cancel or withdraw your question simply press star 2. If you have been listening through a speaker phone but would like to ask a question, we ask that you lift your handset prior to pressing star 1. Remain on the handset until your question has been answered. This will ensure good sound quality. We will now start with questions in the room.

Clarence [INAUDIBLE], [INAUDIBLE] and Company. Two questions on the McGraw Hill and on the Standard and Poors section of the business. The new issue market, I would like to hear some comments that you might have in light of the economic environment that business environment is what you are looking for the [INAUDIBLE] market. The second question has to do with the independent research service that you are offering. Is that service going to be any different from what you have been traditionally been offering to the public? And if so, just how would you be describing the independent research that you are offering to these independent brokerage operations? In that connection, to what extent have you beefed up your research department to offer this service, and just how are we looking at profit margins from this business segment?

Harold McGraw, III: Okay, thanks very much and -- you know, what you are seeing, you know, again, with the economy recovering, you are seeing some unevenness in terms of indicators, and that's going to have an effect on the various categories within the credit rating agency side -- of S&P. For example, what we still see is a very low corporate new issue of marketing. Yet, we see, obviously, treasures that are still flush with cash that are now starting to get aggressive as MNA [PHONETIC] activity pick up and capital expansion, planned expansion and those things. You are seeing it in terms of the equipment spending numbers. We are now saying about 13% this year and probably somewhat similar next year in terms of outlook. So you will see shifts back and forth in terms of the categories. The states are healthier than we all anticipated at this point; and therefore, the public finance market, you know, is quite soft on that. But the structured finance market, in contrast, is quite strong, both here in Europe and in Japan, and we are also seeing is that, you know, the strength in Europe with its new issuance market, you know is also been a factor. I think in fact, it was up 11.4% in the first half of this year compared to the U.S. being down 8.7. You will see lot of mix, you know, change on there. Overall, because of that, because of our nontraditional [INAUDIBLE], because of the bank loan ratings, counter-party risk ratings and the like, because of that global network, we will continue to be in a very strong position. And therefore, you know, we feel very confident about the double digit top and bottom line forecast that we have there. I would also say that at this point it's way easterly to start talking about next year. But the way things are shaping up and the way that you strengthen the economy is a lot higher than we had expected, as well. We clearly will in a double digit top and bottom [INAUDIBLE] on that one. As far as the independent equity research, this is a -- you know, again, as we have developed the five star system, five star being the highest rating down to one star, we have been very, very pleased with the performance of our stock picking capability. Five stars are significantly up, and four and three and two and so forth, and those are all tested going back to 1986. And from that, with the strength of the analysts that we have, we have reformatted our analytical product so that now that we can offer a very comprehensive, in-depth capability and we're finding more and more ways to continue to update and to provide a lot of surveillance and intelligent insights to that data in a lot of different ways and we're distributing it in print or on the web. With our customers now in the settlement configuration, you know, now the market will see exactly the quality of that and we're looking forward to that. And because I think that in terms of the whole process of the consulting independent consultants picking the various players, now we'll all get a comparison of the quality of that research and factor it in. And so, you know it's a little early to tell about how big the margins will be and all of that. I think we have to do well with the settlement and, you know, continue to push on the nonsettlement. But this is going to be a major activity for Standard and Poors.

[INAUDIBLE] Question on the 2005 L-high adoption outlook, expectations are running fairly high that we're going to see a big surge in adoptions. But what I don't see the big three -- California, Texas and Florida -- in reading and math lined up for '05. I'm kind of wondering, obviously, there's a lot of health care, music and social studies, but where exactly is the big surge going to come from in your view? Thanks.

Harold McGraw, III: Yeah, thanks, Doug. As you look at the charts, you know, that we have in the 2004 Fact Book, you can go right down and you can see that strength, just in terms of broad base of states that are going to be competing. We are also -- you know, you're going to see terrific participation from what we call the McGraw Hill Learning Group, which is our No Child Left Behind group focused on urban market, and we're seeing tremendous strength there and we will see continued strength as standardize instruction takes hold in some of our larger districts. Florida and Texas and California are going to be active in all of that, plus also in the testing market, and so we plan to participate there. I'm very excited, also -- I would add again -- on the GROW network. It's one thing to be able to have a capability of being able to give you what the test results were. It's very much another thing to be able to tell you, you know, what now you need to do to be able to gain that knowledge that you don't have. And that capability is something that, you know, we're going to be able to take advantage of right away. And that would be in Texas, as well.

So your expectations on L-high adoption growth in '05 is pretty much unchanged at this point?

Harold McGraw, III: Yep. The -- you know, the numbers have floated a little bit as people try and gauge the size. You know, it's going to be somewhere around a billion, probably a little less. Some have it, you know, as low as 900. I think it's going to be over 900 million. And it will be somewhere around there in 2006.

Terry, could you explain this reading -- of the states that get the money, at some point they will buy the books but not going to pay you for four years. When do you recognize the sale and what happens to all this money sitting in some cubicle somewhere?

Harold McGraw, III: Ed, you know, these are issues that we struggle with daily. And first and foremost, my chartist, Donald Rubin, literally has got every dollar that's been approved and appropriated for every single state. And then we use every device we can to find out exactly where it is, and if it's being held up, where. And I was recently out in Colorado and met with the governor. And I was still trying to figure out -- because they are talking about how strong No Child Left Behind has been for the state and the local agencies, and yet there was still some discrepancies about where some of the monies actually were. This is also an election year, and everybody is doing a little finger-pointing. The moneys are there. We are benefiting very definitely with McGraw Hill Learning Group, which is a No Child Left Behind funding operation. And we do know, and I do apologize for all those numbers, but you know, again, the way it was established is that it takes 27 months for you to make a commitment -- I love that "obligate" word -- to make a commitment to spend. But then once you've made that commitment and you've gotten approved funds, then you have 48 months to go. So now give [INAUDIBLE] to spend. Then you've got --

You could not see a book until 2010?

Harold McGraw, III: Well no, because again -- you know, and again, because depends on the state, depends on the Standard, depends where you are stacking up to those federal standards. And therefore, you know, you're going to be held accountable for the results this that progress. So people are trying to get that done. And that is the funding that we are seeing. As we came into this year -- but funding, by our account there was -- there was a billion dollars out there that is available, and by the agreement, that needs to be spent this year. Now, we will, as we get through this year and through the third quarter, we will have a pretty good indication from our own results where those funds are and when they are coming. But they are definitely being spent. The emphasis is -- at this point is to get them spent.

But sounds like to me they're committing, they're obligating. Anybody writing checks to anybody? And also, how do you direct the substitution of state funds?

Harold McGraw, III: Okay, Ed, where you got to go, okay, is you got to go to the grant process in terms of what the states are doing with the local education agencies. Those grants have been approved and those funds have been appropriated. So, you know, where you start getting into the nuances is in some of the things like holdbacks. You know, some of the administrative costs that you can hold back 20% of the funds. You know, how long are those going to be held back? When are they going to be, you know, utilized? The only thing I can tell you that I think is quite positive, I have seen no desire to hold back on getting those materials or the professional training and the reading coaches into the system. And the schools are clamoring for them, and that process is clearly under way. What is difficult right now is to get a clear accounting of where those are. But where you've got to go is you gotta go to the local education agencies that have been appropriated those fund, and that's where you start the accounting.

[INAUDIBLE] so can you actually identify that you sold a book to somebody somewhere?

Harold McGraw, III: Oh, absolutely. That's again, for McGraw Hill Learning Group, that's where that attention is focused, and for us, we watch the Open Court reading, we watch Every Day Mathematics, Impact Mathematics, those sales are doing quite well.

And just to clarify point that I think you're raising. As Terry says, the monies are there. When a state or a district elects to spend is up to them. But when they do elect to spend, they have the monies. So when we make a sale, we aren't sitting and waiting to receive our funds for three years, as you mentioned earlier. They have the money and we will be paid in the normal course of events. So it's a regular sale just like any other type of sale that we would make to a state, and we get paid in the normal terms.

Harold McGraw, III: That's right. And that is a relationship with the state. It is the state's relationship with the federal government to procure those funds. Nobody is passing around checks that I know of .

We will take our first question from the phone. Our first question is coming from John Janedis from Banc of America Securities.

Hi, good morning. Just one quick question. Terry, you had good growth in both Business Week and the TV businesses for the quarter. But it looks like, as you said, other pieces are pretty weak there.

Harold McGraw, III: What was that one, John?

Just other pieces of the info services segment were fairly weak. And I know you touched on those, but can you give more specifics there on the declines, and can you talk about your second half and longer-term outlooks for both the construction and aviation businesses? Thank you.

Harold McGraw, III: What was that? Okay, what was the other one? John, could you repeat the question? Just in the front part. Besides broadcasting and Business Week, you mentioned another one.

Yea, [INAUDIBLE] other pieces there, meaning the construction, aviation; and I think you mentioned to a lesser extent health care. But can you talk a bit more about the second half outlook and longer term for those businesses. Do you see a turn, what drives that, et cetera. Thank you.

Harold McGraw, III: Okay, thanks. You know, John, if I got it right, in terms of the information [INAUDIBLE] and in particular to the business to business side with construction, we are seeing nice progress, given the introduction of the construction network. And I expect to see continued push on that side, and I expect that we're going to have and finish up with a very good year. And we are going to start to see an acceleration of revenue growth for construction. It's very pleasing. The team has worked very hard. It's relatively new team that's come together. and it is showing some terrific strength. On the aviation side and health care side, these are both relatively small properties. And again, given some of the aerospace and defense industry issues, I don't expect aviation to be a rapid grower in this environment. And the health care publications are relatively small, even though I think we will see some more growth in the second half. It's not going to be a significant to the segment's operations. One that I would focus on would be, where we've seen continued strength, is in the energy area. That class has extended very nicely. I was out just out in Platts, Boulder, in Colorado, where we have pulled together from Platts to the acquisition of FD Energy, with Pride Wire, E-Source and the acquisition of RDI. All of those components have come together to create an awfully nice platform in the research consulting and analytics aspect that has given us a very nice dimension there, and so I would see an acceleration to pick up in the second half and in to next year for that group as well, especially with the volatility of oil prices.

Thanks, and just going back to aviation for a second. Do you think that could turn -- I know it's not a huge piece, but does that turn next year? Is that a longer-term structural issue with that business, or how do you view that?

Harold McGraw, III: Well, for aviation, we don't push as aggressively on the advertising side now as we do in terms of the subscription and the data sales associated with being able to develop information fees for large manufacturers. We have a terrific relationship with Boeing in terms of being able to provide them with a very comprehensive broad aviation fee. And we will continue to look at areas like that, because again, [INAUDIBLE] the consolidation of the marketplace, you know, it is not going to be as robust in advertising property; and therefore, the push to get on to an online and into a subscription format is the model we're going to push there.

Great. Thank you.

Thank you. Our next question comes from a Frederic Serbi with JP Morgan.

Good morning, thank you. It's Frederic Serbi. Couple questions for you, Terry, and congratulations on the results. They were exceptionally strong. Can you give us some sense here as -- first of all, the margins were up at the education business. And is that -- is global transformation -- you know, GTP, I thought was really a next year story, improving margins, or some of the digitalization integration already yielding some benefits there or is it really just a mix issue? And then I know you're probably loathe to do this, but can -- you know, equity and the -- obviously the index business, it sounds like -- and we've expected this strong growth there -- are you growing as fast in the second quarter as the ratings business? And you know, can you give us some range of what percent it represented in the second quarter of overall financial services? And just to re-iterate something I thought was interesting. You said S&P, you'd expected -- I think what you said next year to be up double digits top and bottom again, if you could just confirm that I heard that correctly. Thank you.

Harold McGraw, III: Thanks, Frederic. From a margin standpoint, for the three operating segments -- number one, for financial services, again, to a lot of the process improvements a lot of the operational efficiency as well as the market growth, it is -- it has been stronger than we anticipated. And we altered the guidance that we had originally given, which was to hold that margins would be at the 2003 level. We now believe it will be at least at that level. And we are seeing some strength there. On the education side, again, because this is a -- the market is soft in terms of the adoption market and so forth, we have said that it is probably going to be difficult. Our near term is to get to 15 and then move from there. My guess is that at this point getting to that level is not going to be attainable. So it will be just below that. In information media services, we fully expect margin improvement as the recovery gains strength, and as we continue to position the [INAUDIBLE] property for growth; and therefore, you will see margin improvement there and again 15% should be doable. As far as the global transformation project, it is too early to tell on that one, Frederic. Again, we are in the rollout now in the United States. It's going very well. I'm very pleased with the progress we are making. By the end of this year, we will be making the plans for the GTP rollout for next year outside the United States. And then we will, as we assess that progress, then we will try to equate that back to the kinds of cost savings that we fully expect on that as well. I think it's safe to say that we very much have in mind margin improvement based on GTP. And it's too early to tell exactly what that number could be.

And as part of the financial service index, was the growth as strong as it was in the ratings business in the second quarter?

Harold McGraw, III: Yes, we don't break that down to that. But I can tell you on the equity side, as you know, we have been putting a lot of attention into this whole area and building up the analytical side, the analyst network, being able to broaden the coverage. And it's a coming together of a lot of the components from, as you know, portfolio advisor, research insight, research insight on the web, which is all copies -- pulling all of that together to be able to take advantage of the full capabilities that the equity side has. Being able to push out in terms of some of the alternative investment areas, such as the hedge fund areas, as well. Building out the indexes around the globe is one of the major pursuits. I mean, you know, we fairly recently launched the S&P Civic 50 and 300 in Beijing, and we have done the Italiano Borso, we've done the Hong Kong exchange. And you're going to see that continuing. The number that is quite impressive is the $90.1 billion in exchange traded funds. And what you are seeing is a move away from some of the mutual funds to the exchange traded funds, a move that I think we will see continue over the years going out. And it is become -- exchange rate funds has become an investment vehicle of choice that way in its popularity. So those are doing very well. And you know, we've got to see how the progress, which was going to be measured what I absolutely love and everything that we do where there's competition and it's all very transparent. And that is only good because if you not doing well, get better and if you are doing well, stay on that track. And so the independent consultants with a settlement houses need to file annually a full performance report, on all their independent equity research providers, which will be made public. And so we very much like that kind of system and our position in that. So we'll have to see how that all goes. But this an area that we expect to significantly grow and expand here and around outside the United States.

And did I hear you correctly that you expect the financial services to be up double digits next year, as well?

Harold McGraw, III: Correct.

Oh, great. Okay. Thank you. Congratulations.

Harold McGraw, III: Thanks, Frederic.

Thank you. Our next question comes from Peter Zokowski from Goldman Sachs.

Yes, good morning. On the financial services, you speak of some of the categories building momentum in the second quarter having a good finish to the quarter. Does any of that carry into the third quarter?

Harold McGraw, III: Yeah, absolutely. And when you talk about the structured finance market, it is strong. It's going to continue to be strong. There is going to be, you know, obviously shifts in terms of some of the growth, as some of the refinancing activities, you know, slow down, you will see more of a pickup in some of the commercial mortgage backed securities market, as well as the collateralized debt obligation area. If you take a look at some of the news that we got yesterday, I believe it was on the new housing starts here in the U.S., it was quite bullish. It was a very, very strong report. Nonresidential construction, however, still remains a little soft. As we see that pick up, that will translate more into some of the commercial mortgage backed market, and so you're going to see shifts within that design. But the structured finance market is going to continue to be strong. Bank loan ratings is going to continue strong. Rating evaluation services will continue strong. And eventually, we're going to start to see -- as interest rates move, you're going to start to see corporate treasures starting to reconfigure their balance sheets and you'll start to see a pick up in corporate finance activities. You are still going to see a very strong high yield market as part of that. So it's a mixed change within, but you're still going to see continued strong growth.

So how did the impact of the 25 basis point move at the end of June? Has that had any impact concerning the momentum going in the second half of the year? Or are you still pretty bullish on the second half?

Harold McGraw, III: Very much the latter. You know, we're still very bullish on that. When interest rates move in either direction, the question is, why are they moving? Originally, we came in to this year thinking that there would not be an interest rate hike before the election, and maybe not until year end or into '05. The reason that got accelerated is clear and simply that the economy is stronger than anybody had originally expected. We are going to do about -- we're going to do over 4 1/2% here, but some of the other numbers in terms of the growth that the U.S. has had and the effect that it's had on the other four non-U.S. regions, you know, is quite impressive. Japan is going to be over 4% growth, you know, this year -- who would've thought? You know, at that level? And a lot of that is starting to come down from domestic production, not just from the exporting side. And so that's a very clear sign. As they continue to pursue the bank reforms, we think that market is going to be very strong for us. Asia, non-Japan, is going to grow 7 to 8%. China will probably be 9 or a little bit under that. Latin America is growing at 4%, with Brazil and Mexico leading that component. And Europe, which everybody had given up on, you know, we had around 1 1/2% growth, is going to be at least at 2% now. And your zone could go even higher than that. So the picture has improved, and I think the U.S. economy has helped in terms of that environment; and therefore, capital market activity, I think, will continue to be quite strong.

Great, thank you very much. Quick question for Bob. On the share buy-back program, you mentioned you were going to do 3 to 5 million this year. You've already hit the bottom of that range. Are there plans in the second half to continue to buy-back? Have you bought any back since the end of the quarter, into now?

We were in the blackout period for the month of July since we were releasing earnings. But as I indicated, we will be back in the market again, and 3 to 5 million is the range that was approved by the board, and most likely we will be at the upper end of the range. Great. Thank you very much.

Thank you. Our next question comes from Carl Choi [PHONETIC] with Merrill Lynch.

Hi, good morning. Couple of questions. One, I wonder if you can update us on your outlook for urban territories this year. And two, your TV stations' performance in the second quarter seems to be a little bit below some of the peers. [INAUDIBLE] still an issue, and if you could -- if that's the case -- [INAUDIBLE] in the third quarter.

Harold McGraw, III: I'm a little bit curious, and I didn't catch the last part.

I was asking about the TV stations moving forward.

Harold McGraw, III: Open territories, you know, is still an open situation. I didn't mean that. We won't know until the end of the third quarter exactly where we are on that. My guess is that, you know, we're going to be doing a fair bit better that year overall in terms of open territories compared to '02 and '03, and a large part of that is a softer adoption market. Those materials are released in 2002 and 2003 are making their way into some of those markets. You are probably looking at a number -- and I shouldn't be guessing, but you know, it's definitely going to be over $2 billion. And I think it could be, over the distance, upward from that. But I think you can assume 2.1, 2.2, somewhere around there. And then on the television side. Again, you know, it's -- you know, each of the geographic locations have their own issues. We are pacing now at a better rate than we were as we came into this year. We have seen the recovery for both our San Diego and Denver station, in particular. And especially with the auto advertising capabilities and a lot of the personal and professional services side kind of advertising. I would hope that in the second half that that would continue to pick up. And again, the wild card is the political advertising, which again in a national election we would expect to do well.

Great, thank you.

Thank you. Our next question comes from Brandon Dobell from Credit Suisse First Boston.

Thanks, good morning. Terry, I wonder if you could address one thing that I believe Pierson mentioned yesterday on their trading statement. They actually came out and said they were number one in math with a percentage, I think , in the high 20s; and given what you said this morning earlier about the adoption percentages in math, just trying to figure out what's going on definitionally or if you could reconcile those numbers. And then second view, for Bob, the change in guidance on free pub, it's a pretty big -- from 290 down to 260. I wondered if there was something that you guys had planned on doing or if the numbers are just kind of coming in a lot lower for any particular reason, or if there's a number of things going on to change that guidance. Thanks.

Harold McGraw, III: Thanks, Brandon. Okay, on the math -- and again, I can't talk about anybody else's on that one, but I can tell you what we do. We add up all the available dollars in the K-12 adoption space. We take the total revenue that we receive in those math products and we divide the two and we get over a 30% capture rate on that. And our focus has always been in terms of -- it's the same thing with reading -- the diversity of the product lineup that you have as it relates to more and more of the segmentation of the marketplace. And again, there is a lot of blurring now in terms of different types of products for different types of learning capabilities. And therefore, you know, we just take the total dollars that are available and divide what we get on that part. And I read some of the same stuff that you do, and it's amazing how somebody can look at the same thing and come up with a different answer. Maybe we need more math training.

Okay, appreciate it.

On the question about the reduction in the overall spending and free publication costs. This is just simply us looking at how we're spending our monies and looking at opportunities. I just want to emphasize the outlook for the programs, we're still as bullish as we had been. We are not curtaining anything. It's just simply the level of spend, and we're using more technology than we had originally anticipated. That's one aspect of it. But in addition, we had some best practices, best practices efforts, in some of our different groups. We are leveraging some of those smart buying opportunities and we're seeing good cost reductions. So it's just simply being smarter how we're spending our money, using technology and leveraging it in the best way possible, so we are still extremely excited about the opportunities facing us in 2005-2006.

Harold McGraw, III: Yeah, the only thing I would add to that is that again, in terms of when we talk about expense management and controls and all of those kinds of things, we are constantly looking for new ways to reengineer and reprocess some of the things we are doing. Bob's team has been very, very focused on operational efficiency throughout the organization, and we have been able to achieve a lot that way, as well as organic growth and acquisition growth. But operational efficiency is a big component to that, and some of that equipment spending is going for that.

Okay, thanks a lot.

Thank you. Our last question comes from Mr. Steven Barlow with Prudential Equity Group. You may ask your question.

Thanks. Two things for Bob, please. Talk about, just about the corporate expense, what you think the run rate will be for the third and fourth quarter. Sounds like some of the increase in expense was one time, but some will be ongoing. And secondly, as more and more of your revenue comes from overseas, should we be seeing your tax rate come down in '05 and '06? Thank you.

With regard to the first question, Steve, in terms of the run rate for corporate expense, as I mentioned in -- earlier in the year, we would be running at a higher rate during the course of the year because of the duplicate rent, et cetera, of vacant space. This particular quarter, because of certain corporate initiatives, is at a higher rate. So you will see the rate of increase a little bit lower in the third and fourth quarters. So you wouldn't expect the same rate going forward. With regard to the tax rate, the 37% does reflect the full consolidated overall rate of our corporation. We are operating in some -- the areas that we have our higher tax exposures outside the U.S. are in jurisdictions that have tax rates that are relatively similar to the United States. So I would not anticipate any overall reduction in that overall blended rate as we look at it 2005 and 2000.

Okay, I wonder if you could just be just a little bit more specific on the run rate on corporate and lower -- I guess what I thought it was going to be, but can you be more specific than that?

Yeah, I indicated earlier that we were most likely going to be in the range of 20% increase over the course of the year, because of the duplicate space and the overall rent rates. So as we look at the third and fourth quarters, we will come down closer to that level. Again, we were talking about a relatively smaller overall increase on the year-to-year basis.

That's fine. And then, Terry, it appears from your press release that testing operating profits might be down. Was that the case?

Harold McGraw, III: Testing?

Testing.

Harold McGraw, III: Well, again, we don't break out those components. But our testing business is doing quite well. We are -- again, when we start talking about what we're doing in the whole testing and assessment area, there is a whole game plan that is going to provide a whole host, a whole suite of services on that one. The GROW network was an acquisitions capability -- I mean, was a capability acquisition to enhance that component of it. It is a very strong market, and as we get into the federally mandated testing next year for grades 3-8 for math and reading, that study is a -- going to be a big opportunity for us.

Thank you.

Harold McGraw, III: Thanks, Steve.

Thank you.

Harold McGraw, III: Terrific, thank you all very much.

I would like to turn the call over to Mr. McGraw for closing remarks.

Harold McGraw, III: Thank you very much.

This concludes this morning's call. On behalf of McGraw Hill Companies, we thank you for participating and wish you a good day. You may disconnect your line at this time.