標普全球 (SPGI) 2004 Q3 法說會逐字稿

Good morning and welcome to the McGraw Hill Companies third quarter, 2004 earnings call. At this time, I want to inform you the call is being recorded for broadcasting 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 the presenter's live available on the internet. To do that go to http://www.mymeetings.com/nc/join. I'll repeat the URL once more for those who would like to view the presenter's slides online. It's http://www.mymeetings.com/nc/join . You will be prompted to enter your name, the net conference meeting is PH 8133916. The password is McGraw Hill, all caps with a space between McGraw and Hill as the event type is conferenced. This call is also being simultaneously webcast from McGraw Hill's Investor Relations website and will be available for replay about 2 hours after the meeting ends both by phone and on the web for 7 days. If you need assistance at any time, including having your volume adjusted higher or lower, press star, 0 and I will assist you momentarily. I would now like to turn the conference over to Donald Rubin, Senior Vice President Investor Relations of the McGraw Hill Companies. Sir, you may begin.

Thank you. Good morning to our worldwide audience. Thank you for joining us here at the McGraw Hill building on the phone and the web for this morning's announcement of the McGraw Hill Companies third quarter earnings. I'm Donald Rubin, Senior Vice President of Investor Relations for the McGraw Hill Companies and with me today are Harold McGraw, III, Chairman, President and CEO, and Bob Bahash, Executive Vice President and Chief Financial Officer of the corporation. This morning we issued a news release with our third quarter 2004 results. We trust you have all had a chance to review the release. If you need a copy of it and the financial schedules, they can be down loaded 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 meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10- Qs and other periodic reports filed with the US Securities and Exchange Commission. We're 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 presentation we will open the meeting to questions and answers. It's now my pleasure to introduce the Chairman, President and CEO of McGraw Hill Companies, Terry McGraw.

Okay. Thank you very much, Don, and good morning to everyone. We appreciate your attendance here today and if you're joining us on the web, we appreciate you joining us as well. I'm Terry McGraw, I'm Chairman and President and CEO of the McGraw Hill Companies and, as Don said, with me is Bob Bahash, our Executive Vice President and Chief Financial Officer. We'll review the third quarter results and our financial condition overall and after these presentations, obviously, we are very pleased to take any questions and go in any direction that you would like to do so. Let me just begin by recapping our third quarter. Diluted earnings per share from continuing operations grew 11.9% to $1.69. Income from continuing operations grew by 12.2%, revenue grew by 5.8%, expenses grew by 2.9%, as we kept costs under firm control. As a result the corporation's operating margin expanded to 32.4%. Based on this very solid third quarter performance we are, again, raising our earnings guidance for the year. Our earlier forecast that called for a high single digit growth in earnings per share from continuing operations in 2004 and, again, that's without that recurrence of the 30 cents after-tax benefit from the sale of the equity interest in Rock-McGraw. We now expect that double digit growth and earnings per share from continuing operations will exist in 2004 and, again, without that recurrence of the 30 cent after-tax benefit from the sale of equity interest in Rock-McGraw. Growth in the fourth quarter. By growth in the fourth quarter will be influenced by a somewhat slower then anticipated recovery in advertising, softness in the corporate and public finance markets, tougher comparisons in the residential mortgage-backed securities market. There will also be some dilution of approximately 2 cents from the recent acquisitions. Still, we're very confident in our new earnings guidance and we're very pleased with the progress that we have made in the third quarter. The economic picture is still very good. David Weiss, our chief economist at Standard & Poor's expects GDP growth in the United States to be 4.3% this year. Capital expenditures for equipment, very important in terms of some of the advertising indicators we watch, is still expected to grow about 13 to 14%. The unemployment rate is very stable. The cash position in corporate America is growing. The corporate cash to long-term debt ratio for S&P 500 companies is now close to 40%, up from 20% about a year ago. We will continue to operate in a low interest rate environment with more modest rate adjustments expected from the Federal Reserve. We still expect to end the year at around 2% and go to about 3.5% or so by the end of next year and probably, entering into 2006 somewhere around the 4% level, the fed funds rate, which would be 1% below nominal GDP and about 2 percentage points above core inflation which is -- is very much in keeping with historical averages. Well , that's the bigger picture, let's take a look at each of our operating segments and go through their reviews. Let's start with McGraw Hill Education. For the third quarter revenue increased 2%, operating profits grew by 9.1%, and the operating margin improved to 32.2. This is a critical quarter for the education segment each year and our education operations took share, even though market conditions were not particularly robust. At our Higher Education Professional and International Group revenue for the third quarter is up 5.8% and 5.9% year-to-date. The latest available year-to-date statistics on the U.S. higher education sales show results only through August. The Association of American Publisher reports that the higher education market is up about 2.5% and we expect to outperform the higher ed market this year, which we still think will grow about 2 to 3% which is what we've been saying since the beginning of the year. At our School Education Group revenue is off about 1% in the third quarter and 1.9% year-to-date. According to the latest available AAP report, L-High industry sales through 8 months are down 2.8% and we still believe the industry will finish this year off 3 to 5%, somewhere there. And we still expect to outperform the market. Now let's look more closely at how we are achieving those results. In higher education, it was a big year for our business and economic titles, led by the new 16th edition of McConnell's Economics, the world's best selling economics text. We also saw improvement in our list for science, engineering and math, as well as the humanities, social sciences and language arts. The For Profit Schools represent one of the fastest growing areas for us in the college and University market. Our dedicated sales force for the University of Phoenix, Corinthian, ITT and other schools in this field is making a difference. This is still predominantly a market for textbooks but we're starting to meet a growing demand for E-learning materials. Leveraging, the proven content to provide online instruction, is obviously going to be a key to our future. And yesterday we reached another milestone in this journey. We announced that our Higher Education Group is teaming up with Cisco Systems to introduce the next generation of E-learning solutions. Cisco is already the leader in networking for the internet but by harnessing Cisco's global learning network we will begin to deliver online courses with animation, streaming video and personalized assessment that will enhance learning and give educational institutions new options for improving and providing instruction. Since last year, we've been piloting an online algebra course over the global learning network and we plan to introduce nearly 50 courses during 2005. The McGraw Hill courseware may be used as a complete online course or as part of a regular course with both classroom and online instruction. So there's a lot of flexibility for instructors as well as for students. The instructor is, obviously, still critical, even as the technology facilitates real-time assessment and personal feedback, and, yes, there is still a textbook. Clearly, the whole package makes it more effective learning for the student which is, obviously, what it's all about. Earlier I pointed out Mcconnell is the world's best selling economics textbook. Another world class title, also in its 16th edition, was a key contributor to our third quarter result, and I'm speaking, of course, of the world's best selling medical text, Harrison's Principles of Internal Medicine. It again sold well both in the United States and abroad, in particular, in Asia and India. In professional markets providing information online is an important growth initiative, Harrison's is a critical component of our growing web based access medicine service and we're continuing to expand that. Last month we introduced Current Medical Diagnosis and Treatment Online, CMDT Online, and physicians can now download material for the CMDT Online to their own handheld devices so that they've got one-click access to current literature on diagnostics and treatment protocols. We've also successfully launched SAT Star 1, our first entry into the SAT test prep market. In the elementary and high school market, a more then 30% reduction in new state adoption opportunities is obviously having its impact, but it hasn't prevented us from increasing market share. This is not. and I repeat, this is not a one-size fits all market. So, we deliberately offer a variety of products and services to give our customers the most important component here, choice. In a new state adoption market for math this year, the strategy enabled us to capture 36% of the total available dollars and emerge as the K-12 leader, period. We offered 3 programs in the elementary grade. Macmillan McGraw Hill Mathematics, which, frankly, didn't meet our expectations, Every Day Mathematics, which is already growing rapidly in open territories and it beat expectations by quite a bit, Growing with Mathematics is a new primary grade program which also showed significant strength. But our performance was even more powerful in the middle and the high school market where more of the dollars were available. Here we also produced a diverse and up to date book bag. There was state-of-the-art customization that aligned our titles to state standards and made it easier to focus on the essentials for teachers. We worked very hard to make that content very clear and complete so that teaching and learning would be easier. That's why we're having the best editorial team in the business in a competitive advantage state. We supported our titles with technology for teachers, students and parents. Online editions of our text, plus things like Teacher Works, Student Works, Exam View Pro, and Website Resources, were all a part of our package. Our success in mathematics carried into the open territories. That includes the largest single order for math in the open territories in our history, more than $20 million from New York City for K-8 products. The "No Child Left Behind" programs continue to stimulate activity in reading and in testing. The available funding from local education stories remains difficult to quantify but sales of our programs to districts buying materials for Reading First have increased in every quarter this year. We do know that the Department of Education recently released 80% of the third-year Reading First bonds to the state. By the way, that's another $1 billion, these funds will be a factor next year. Another $90 million in grants was also just awarded for the third year of the Early Reading First program. We continue to monitor the situation, obviously, very carefully. We have learned that some states like Texas and Massachusetts, will continue to fund existing Reading First schools at current levels. Other states like Missouri, plan to add new schools to their Reading First program for the 2005/6 school year. At this point, we expect, still, more funding for the fourth year of these programs when Congress passes the fiscal 2005 budget, which will, obviously, be sometime after the November elections. We know that the emphasis on reading will continue to grow. As part of that trend, more attention will be paid to the underachieving middle school students. Intervention programs are required to help these students who are moving through the education system with reading skills that are 2 grade levels, or more, below where they should be. We expect the Federal government to step-up funding for intervention programs when specially, with the program called Striving Readers. Of course, 2005 is going to benefit from a much stronger adoption calendar. That could top probably,$900 million, maybe more. Social studies offers the largest opportunity, but there are also good listening for vocational and other non academic subjects in which McGraw Hill traditionally does very well. Our programs continue to make that recommended list in the adoption state, a process that will probably be wrapped up by December of this year. The outlook for testing will continue to improve. The third quarter is a seasonally slow period for testing, actually, the fourth quarter is typically, the biggest each year. We're encouraged by winning a new contract for the District of Columbia schools and we expect to announce very shortly more exciting new testing contracts. With the acquisition of the Grow Network in the third quarter we have also added an important new capability in this testing market. The Grow Network will provide an important competitive advantage for us, as the market -- and the market for customized reporting and assessment expand. And I want to share with you one example of what the Grow Network can achieve quickly and effectively. In Texas this year, more than 211,000 11th graders took the Texas Assessment of Knowledge and Skills exit exam, the TAX exam. Two weeks after getting the test results from the Texas Education Agency in August, the Grow Network produced and distributed 51,400 work books individually customized for the 29% of the students who failed to meet the passing standard. The Texas custom workbook is designed to help students prepare to retake the test by showing them where they came up short and, more importantly, how to fix it. There is always the hope that we can learn, obviously, from our mistakes. In Texas this year the Grow Network has made that notion real by creating an objective study guide that can help students achieve a better outcome the second time around. Reports from the field indicate that the workbooks are being used by teachers, counselors and parents to help average students prepare for a second chance to pass the test. Now, that is impact! And I might add this is all possible because of a wonderful, wonderful management team at Grow Network that we're all very, very proud of. So, summing up, for the McGraw Hill Education segment, in markets where one size does not fit all our diverse strategy enabled us to gain share in the elementary/high school markets. We gained share in the U.S. college and University market. The prospects for 2005 are excellent and technology will continue to play an important role in education, which is a plus for us and our businesses. Okay, with that, let me turn now to our financial services segment. In the third quarter here, revenue increased 14.1%, operating profits grew by 17.7% and the operating margin expanded to 40.2%. Our results at Standard & Poor's illustrate, again, how we can overcome mixed market conditions with a strong and diverse portfolio that has been created over the last several years. Standard and Poor's has a record -- has had a record quarter, even though there was softness, once again, in the U.S. corporate and the public finance sector. We can point to 4 basic reasons for our performance. First is international growth. We grew faster over seas then we did domestically. International ratings are now 35% of ratings revenue and we expect this percentage to increase in the years ahead, with a growth, in particular, in Europe, Japan, pacific rim, Canada and in Latin America. Secondly, is our product diversity. Services including bank loan ratings, counter party ratings and rating evaluation services. These are all services which are not tied to the new issue market, our nontraditional ratings capabilities, continue to grow faster then more of our traditional ratings and now represent about 20% of our ratings revenue. A third area is recurring fees. Revenue for surveillance activity in customers with annual fee arrangements also contribute to our growth. And finally, new opportunities in the equity markets have demonstrated terrific results. S&P's equity information product are contributing very nicely to our improved performance. But structured finance was a global driver and, once again, we witnessed a surge of activity in the third month of the quarter as issuers took the opportunity to adjust balance sheets at the end of the period. Dollar volume, new issue dollar volume, for mortgage-backed securities climbed 50.9% in the U.S. market. The strength of the residential mortgage-backed securities market continues to be one of this year's major surprises. Some of our forecasting capabilities here are, obviously, somewhat challenged. We had anticipated a 25% decline in the residential mortgage-backed market coming into this year. But it now looks as if issuance could top last year's strong performance by probably over 25%. We have already seen more residential mortgage-backed security issuance in the U.S. market this year in 9 months then all of last year and that was a record year! For 9 months of 2004, 627 billion has been issued versus 597 billion for all of 2003. The increase in the third quarter alone was 53.5%. We have seen a shift in the mix of residential mortgage-backed security issuance this year. Sub-prime issues, which are less sensitive to interest rate, and home equity loans and home equity lines of credit, which are driven by home price appreciation, have emerged as the market leaders in 2004. Commercial mortgage-backed securities and collateralized debt obligations also contributed to third quarter improvement and are expected to do so again in the fourth quarter. US asset-backed market started to pick up in the second quarter and the momentum continued in the third quarter with issuance growing by 19.2%. Issuance for the fourth quarter looks, also, very healthy. As we observed earlier, the U.S. corporate market has been soft this year, particularly in investment grade issues. Financial institutions have been much more active, taking advantage of historically low interest rates. High yield issuance is also off this year, but could increase modestly in the fourth quarter, since there appears to be investor demand even for the lower quality types of issues. I might add that the high-yield market is doing very well this year in Europe, showing significant strength as an alternative to bank loan financing. In Europe corporate issuance was up 26.5% in the third quarter, up 26.5% in the third quarter, and that's in contrast to a 12.6% decline in issuance in the U.S. market. And of course, that's all according to Harrison Scott Publications and Security's Data. The Expansion of S&P School Evaluation services is underway. As you may recall, we are working with a $40 million grant from the Brode and Gates Foundations to create separate websites with information on public education for all 50 states, the District of Columbia as well as Puerto Rico. In the first quarter of 2005 we plan to turn on the S&P website which will contain home pages for all 52 of those entities. Over time, we'll add more data and more analytical content on all of the school districts. In the process, we are now creating the largest database of information on education that has ever been made available to the public. Our index services continue to grow, as assets under management and exchange traded funds based on S&P Index, increased by 38.6% in the third quarter. There was $92.4 billion in assets under management at the end of the September. That represents growth in total assets in S&P Deposit Receipts, Spiders, for the 500, the 400 mid-cap and select sector spiders as well as I-shares. We continue to add products and customers in this area. The newest member of our S&P Depository Receipts, or the Spider family, was introduced last month on the American Stock Exchange. The Spider family added the O-Strip Index. Now that is a representation of 74 companies that are in the S&P 500 that also trade in the dealer market on the NASDAQ. It is the basis of a new exchange traded fund that was launched by State Street Global Advisors. It's off to a good start averaging about 100,000 shares a day. Another advance, cross listing of several S&P I-share exchange traded funds were also introduced on the Mexican Bolsa. The S&P Citigroup Indexes are gaining new recognition in Japan. It was just licensed by the Miju(ph) Securities to create a new passive global REIT fund and earlier this year the Spider family was registered in Japan and we're now being purchased there by Japanese investors. The Global Research settlement is starting to produce incremental revenue. We've already seen one of our major customers expand the coverage provided by Stand & Poor's that will result in an increase in fees. With Deutsche Bank added to the settlement we now have a new opportunity to provide this independent research. Nonsettlement firms both here and abroad are also selecting Standard and Poor's as Equity Research provider. In recent weeks Wachovia, E-Trade, TD Waterhouse, Ameritrade and A.G. Edwards have licensed S&P Equity Research. And we've also expanded our coverage of securities as part of that new arrangement we announced last time we met with Nordea. Simply put, with Independent Equity Research, we're on the move, we're gaining momentum, we're growing our customer base and we like that. On September 17th, we completed the acquisition of Capital IQ This is perhaps one of the most important additions to the McGraw Hill Companies and, certainly, S&P, in a long line of additions. Capital IQ has wonderful people, it has a terrific management team. And it has a technology and data platform that will allow us to reach and to serve new and existing customers worldwide. And the response has been very, very positive. And Capital IQ is continuing to add new clients and with Capital IQ we add to our contempt, we add new customers to our client base and we require an innovative technology platform that we'll utilize to integrate and deliver our data over the web. With Capital IQ S&P will move from a silo based content provider to a more flexible content aggregator delivering critical private, and this is important, third-party information to the financial community over the web. Information that becomes a part of the client's work flow. In closing with financial services segment, let me briefly comment on the ongoing regulatory process. Last month S&P published its own code of practices and procedures. It is an aggregation of our existing policies and procedures. And by the way, you can find that on the website at S&P.com. Importantly, it is consistent with the International Organization of Security's Commissioners, IOSCO, and their principals and, again, underscores our own dedication towards transparent and independent decision-making process. IOSCO, by the way, earlier this month issued its own report on the creation of proposed code of conduct for rating agencies. We worked closely with IOSCO and their task force in connection with the drafting of this code. Some areas still require more discussion, including areas like the role of market forces, arbitration and how to protect investors and we'll address these concerns in a commentary that we will be getting back to IOSCO by November 8th. We'll continue to work closely with the SEC. Recent reports suggest that the SEC may have a proposal by the end of the year. This would be on possible changes in the framework for nationally recognized statistical rating organizations or NRSRO's. We continue to believe that these developments will not have any material adverse effect on S&P and in fact, we enjoy a very good relationship with both the SEC and IOSCO as it should be. And I appreciate their comments about the importance of rating agencies in the capital formation process. We'll keep that one before us. So summing up for financial services. We're well along in meeting our goal of producing double digit top and bottom line growth this year in financial services and we're also delivering on our promise to produce an operating margin that would at least match last year's. A lot of very important activity going on here. And finally, let's take a look at our information and media services segment. In this segment for the third quarter revenue increased 6.6%, operating profits grew by 23.3, and the operating margin expanded to 12.7%. Growth in advertising was the key to this segment's improvement in the third quarter. In broadcasting the influx of political advertising and a step-up in local time sales, helped produce a 9% increase in revenue to 27 million. We're benefiting from, obviously, all the propositions on the ballot in California. Some of the propositions involved the expansion of gambling in that state. They're attracting, obviously, an awful lot of attention and have drawn heavy criticism from Governor Schwarzenegger. He is concerned that California will become the gambling capital of the world if voters approve these propositions. Colorado is witnessing a battle for an opened U.S. Senate seat and after being largely excluded from the early rounds of presidential advertising, Colorado is becoming one of the key battleground states for both candidates in the closing weeks of the campaign. And that's according to a new study by Nielson Monitor Plus as well as the University of Wisconsin Advertising Project. Broadcasting's current fourth quarter pacing is now up to 20%. Business Week celebrated its 75th anniversary this fall. Hard to believe, but, very exciting to be able to do that. And they. did it with a special issue that was the publication's best producer since December of 2000. We're very, very proud of Business Week. Very, very proud of their 75th anniversary. By the way, that helped the business to business group produce a 6.2% increase in revenue for the third quarter. Business Week's ad pages through 4 issues in October are down 1.3%. And that's according to the Publishers Information Bureau. Year-to-date, through the issue of October 25th, Business Week is ahead of last year by 2%, with 41 issues so far this year versus 42 issues in 2003. Business Week continues to set the standard for circulation management by committing itself to an examination twice each year and by 2 audit firms instead of 1. In the future, Business Week's paid circulation will be subject to both BPA and ABC audits. It is another step in our continued commitment to ensure that our advertisers get exactly what they pay for. And we take that, obviously, very seriously. We continue to seek new advertising opportunities in the construction market. We have been selected to become the publisher of a constructor, the Associated General Contractor's Magazine, it will be published 5 times in 2005 and it will be published for the Association's 39,000 members. We are also developing a regional residential magazine for publication in November. It's our first entry into the residential consumer market. The Working title is "My Home in the Rockie Mountains". We're focused on areas here with valuable real estate. If this test launch is successful we could expand into other markets later on next year. Architectural Record continues to have a fine year, producing in August the second largest issue for that month in the publication's 113 year history. The Farnborough Air show in the UK contributed to improved results in aviation. And in energy, news and pricing services for natural gas and oil information products produced growth once again. Summing up for the information and media services segment we're seeing a pick up in advertising. The Outlook for political advertising at our TV stations is improving and we'll continue to manage costs here as we do throughout the organization, very, very carefully. And finally, summing up for the corporation, we're obviously very, very pleased with the progress that we're making across the board in a year that we did not think was going to have as much promise to it. And, therefore, with the kind of performance we're having we have raised our earnings guidance again and again, we expect double digit growth in earnings per share from continuing operations in 2004, and that's without the recurrence of the 30 cent after-tax benefit from the sale of equity in the interest in Rock-McGraw and it positions us very well for a much improved and a much stronger 2005. With that, let me turn it over to Bob Bahash, our Chief Financial Officer, and Bob will go through some of our indicators and then Bob and I will take any questions that you may have.

Okay, thank you, Terry. Company continues to maintain its strong financial position. Our cash position at the end of the third quarter is 424 million, a 10.5% increase from the second quarter's level of 384 million. This position enables us to provide a strong return to our shareholders through share repurchases and dividends and also to pursue growth opportunities. And during the third quarter, we did all 3. Let's start with the share buyback program. It's our objective to buyback 3 to 5 million shares this year in the third quarter. We bought back 568,000 shares for a total of 44 million at an average share price of $77.73. During the first 9 months we repurchased 3.620 million shares for a total of 278 million, which is more than double the repurchases for the same period last year. So, as you can see, we're on the path to buyback 5 million shares in 2004. The board of directors approved an increase in the quarterly dividend of 11.1% in January and we expect on a full year basis to return approximately 227 million in the form of dividends to our shareholders. Now, let's now look at recent investments and Terry mentioned a couple. We spent approximately 300 million on 2 acquisitions in the third quarter, both of which have great strategic value for the company. Capital I.Q, which was acquired in September, late September, compliments Standard & Poor's products through its innovative technology, its applications, tools and solutions, its data platform and it's rapidly growing client base. The Grow Network acquisition was completed in July. The Company has developed a robust technology engine to create customized test reports and customized student study guides, that Terry highlighted, that highlight each student's individual needs and allows educators and parents to react to student's specific performance issues. These acquisitions did not materially impact earnings per share in the third quarter. In the fourth quarter, we expect the EPS solution of approximately 2 cents from these acquisitions. As we look out into 2005 we expect Capital IQ to be diluted by approximately 5 cents. Let's now review capital expenditures. Our CapEx includes prepublication investments, purchases of property, plant and equipment and additions to technology projects. Our prepublication investments were 57 million in the third quarter and on a year-to-date basis 162 million which is 22 million more then the equivalent period in 2003. We expect prepub investment spending for the full year to reach 245 million, an increase of 12.4%. Purchases of property, plant and equipment total 51 million in the third quarter. This increase of 30 million, compared to the same quarter last year, is primarily related to the investment in a corporate aircraft, shifting from our current charter aircraft approach to an ownership approach, due in part to extensive international travel as a result of the Corporation's continued global expansion. For the full year we still expect property, plant and equipment expenditures to be in the $140 million range. Addition to technology projects totaled about $2 million during the quarter and on a year-to-date basis 8.6 million, which is below the 20 million that we spent for the comparable period in 2003. Investment levels have declined as we completed the global transformation project, or GTP. Earlier this month we switched over more education units. The implementation was successful and today the North American platform for the McGraw Hill Education segment is running on a single Oracle infrastructure. We're now preparing for our international roll-out and we expect expenditures for all technology projects to be about 20 million for the full year this year. Let's now look at our corporate and interest expenses. Corporate expenses increased by 23.7% or 6.2 million to 32 million in the third quarter. This is primarily due to the rental space we retained for future expansion at corporate and an increase in compensation related expenses. And as you may recall, this is about in line with what I had indicated in the earlier part of the year, that we'll be running at roughly this rate for the balance of the year. In the third quarter we had interest expense of 1.9 million which is about equal to where we were in the third quarter of 2003. Year-to-date interest expense is 5.8 million comparing to 7.4 million last year. The primary reason, of course, was the client, of course, and our debt. Now, included in the third quarter results is a non-cash interest element of 2.5 million related to the sale of lease-back of our interest in Rock-McGraw, again, that we talked about earlier this year. Let's now review the non-cash items. Depreciation for the third quarter was 22 million compared to 20 million in the third quarter of 2003. For the first 9 months of the year depreciation totaled 67.5 million, a 9.4% increase compared to the first 9 months of 2003. We're expecting about 100 million for the full year for depreciation. Amortization of intangibles for the third quarter was about 9 million, up from 8.6 million in the same quarter last year. Through 9 months, amortization of intangibles totals 23 million, a 12% increase over 2003. For the full year we expect the run rate to be about 30 million. Amortization of prepublication costs for the third quarter was 113 million, 17 million lower then the same quarter of 2003. Year-to-date amortization of prepublication costs decreased 5.4% from 231 million in 2003 to 218 million in 2004. For the year we expect the prepub amortization to be about 260 million which is 26 million below last year's figure and, of course, this reflects the limited adoption opportunities in 2004. One final housekeeping item. We'll be making our regular quarterly dividend announcement one day later this quarter, October 28th instead of October 27th. This is due to the board of directors meeting that is scheduled this month and it's going to be overseas. Of course there is no change in the record date or payment date. Now, thanks and back to Terry,

Okay, that's the summary on the third quarter. Again, obviously, we're, you know, we're very pleased with the results. And, you know, they are, obviously, a part of the continue recovery and the economic conditions here in the state. But, also, around the world as we've seen good growth factors from the 5 important economic regions around the world. Certainly, for us the surprise factors had to do with the residential mortgage-backed market doing so well. With nonresidential construction activity running a roughly little better then 3% we expect a shift from the residential mortgage-backed to the commercial mortgage-backed market. We saw, you know, very, very good strength here and around the world in our higher education and professional products. We also benefited very nicely with our "No Child Left Behind" group, the McGraw Hill Learning group with the "No Child Left Behind" funds. And again, also, very strong expense control across the board that we initially put in place in early 2000 and have continued. And that will also be a big part of these factors. So overall, it's given us these kind of results and it positions us well, you know, for 2005. And with that, let me turn it over to Don Rubin and we'll go to your questions.

Thank you. Just a couple of instructions for our guests here in the meeting. Please use the microphone when asking your questions so that your phone participants can also hear the questions. And please, if you will, state your name and your company. 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 to indicate that you wish to enter the queue to ask a question, to cancel or withdraw, simply press star, 2. If you've been listening through a speakerphone but would now like to ask a question, we ask that you to lift your handset prior to pressing star, 1 and remain on the handset until your question has been answered. That will ensure good sound quality. We'll now start with questions in the room.

Doug Arthur, Morgan Stanley. Terry, this is a pretty big upside surprise to earnings in the quarter. I don't think there's any question about that. The financial group with rates going down throughout the summer, that's not a real shocker. But, I'm not used to seeing the company do this well on the bottom line in education in such an obviously weak year for L-high, particularly, because theoretically your development costs would be picking up for the '05 adoptions. Is this -- you've obviously had a fundmental shift in the cyclicality of this group. One question is will that limit the upside in a big adoption year in '05? What has changed in this segment? And the finally on the fourth quarter, are you implying, you know, low single digit earnings growth in the fourth quarter or is that an overstatement? Thanks.

Okay. Thank you, Doug. Doug, in the education segment we have been investing, as you know, at a pretty good level the last several year as we're getting ready for the 2005 and beyond adoption calendar. So, that has been well planned and is well underway. The -- if there's surprise factor here, it's the strength of the McGraw Hill Learning group and the "No Child Left Behind" group. We're very pleased with the direction that that's going and the management team there. We are focusing, like "No Child Left Behind", on a national urban markets, standardized instruction, early childhood learning, professional development and we're really making a difference on that side of it. I think that from a competitive standpoint, we have really outpaced many in that particular area. That's one major area of change for us. Certainly, also, the strength of the math adoption this year, the biggest opportunity, was also a factor. Another one that is our biggest single educational unit is obviously Higher Education. We put a lot of emphasis here. It is doing exceptionally well. And in particular, outside the United States and the margins there and that kind of improvement have -- we've benefited from. I'm just pleased that more in the aggregate that we've got very clear focus. We've got very good execution. We've got very good controls of our resources. And you're going to continue to see, and, you know, I hope, you know, that kind of progress as we get into this very, very important 2005 2008 period. As far as the fourth quarter is concerned. You know, we aren't going to predict, you know, a particular number for the fourth quarter. We do expect, obviously, growth. And the only thing that I do caution is that, you know, the recovery in the advertising side is modest. You know, we've seen all year long that we had that March to June period was quite strong for Business Week. And then all a sudden we saw it taper off and then, with equipment spending numbers up, profits up, we started to see it again and so, it has been somewhat mixed but it has been steady. It is a modest recovery. We expect that to continue into 2005 along with the indicators that we follow on that. But for, you know, the fourth quarter we're going to be influenced by that. My forecasting of the residential mortgage-backed market has been abysmal. We do expect that to continue to show some growth. But that has to start to slowdown in terms of comparisons and a shift to the commercial side. And so, just with some of those factors plus the, you know, 2 cents dilution from the acquisition we just think that it's a -- it's going to be a more modest but, it's certainly going to grow.

Terry, if I could just add to the cross containment within education. Doug, as I mentioned in my remarks, the prepublication investment side has increased. That's investment added to the balance sheet because of the -- that's the development of titles for future release. But the prepublication cost side, the amortization that runs through the current year income statement, declined on a year-to-year basis simply because of the lighter adoption calendar and lighter product release. In addition, there's a much higher variable cost component relating to sales, marketing, promotion efforts, with regard to new product launches. And since there were not that many significant product launches this year and a lighter adoption year those costs were held in check and under control. That adds to the really tight and prudent cost containment efforts that the education segment did.

I would also add that I'm, you know, that I'm very pleased with where the global transformation project is. The roll-out this year in the United States has gone very nicely. We start the international roll-out, as Bob said, early next year. But, the investment here that we made, this is 180 million project. The Investment here now is over. Obviously, you have the amortization on the investment going forward but that will be offset by the cost savings and eventually as we get those cost savings it's going to add to the segment margin. We're pleased where that is. Ed.

Good morning. 2 questions. Looking at '05, higher at McConnell's, the medical book, et cetera. Are those annuals? They're not going to repeat next year? Correct, number one. And number two, a followup on Bob's comment. Are you suggesting then, that as we go into '05 and '06, marketing and sales costs sort of ramp up as product comes out? And that would be quote, a challenge, unquote, going forward?

Right. Thanks, Ed. You know, this was a particularly strong revision year for the business and economics titles. That will continue on that one, but, we benefited very nicely from it this year. The other one, obviously, was also Principles of Internal Medicine by Harrison's and that's a worldwide seller as well. I continue that part. There will be some shift, you know, to the humanities and some of the social science area. But at this point, we're in the forecasting sort of mode now. As we're doing a lot of our planning in December we'll come out with some numbers but I expect a, you know, a pretty good higher education year next year. And we'll be able to break that one down. In terms of sales and marketing expenses, one of the things by having size and scale in the education segment, it allows you to have very strong sales forces, obviously, year around in all of these particular segments. The issue really is the cost factor that that takes on in a down year, if the market is a down year you still have those expenses. You won't see a lot of ramp-up in terms of sales and marketing. That's a pretty steady state number and we're all looking forward to an improved market.

Right.

Yeah, the amortization prepublication costs would go up as we introduce new products into the market?

Hi, Bob McManus, Neuberger Berman. My question deals with the American Jobs Creation Act of 2004 that was recently passed by Congress. This new law calls for repatriation of foreign derived earnings to the U.S. for a limited time only at a special low rate of approximately 5%. With about 20% of your revenues coming overseas, I wonder if you will take advantage of this new law and if so, how.

Sure. Well, you know, there's a number of issues here. In terms of the recent, you know, corporate tax package that was just on, we're examining a lot of opportunities here in terms of how we can benefit in terms of some of our foreign source income. I don't see at this point, a -- any particular benefit from a change that we could make, in terms of what we're doing. I would say, though, that it's encouraging and in particular, you know, to see the Fisk ETI, you know, portion of this finally addressed in the bill And we are, you know, particularly interested in, you know, the development of our global opportunities and we will continue to look at, you know, the tax implications that they have and we'll form around that.

Terry if I could just add to that. We're studying the incentive internally as well as with our consultants. As you know, the incentive can be obtained for distributions in one taxable year, either 2004 or 2005. We're looking at 2005 for obvious reasons. We don't want to do anything premature and to the extent that we have a continuing growing businesses that generate more and more cash, we hope to benefit ourselves by getting as much as we can reptriated to the United States in 2005. Clearly, like us, many other multinationals are facing the same issues. As you look at the repatriation you are also looking at the balancing of making certain that you have adequate financing needs to run your businesses overseas. We're not in a position right now to size exactly how much that is. But clearly, this is something that we do plan to take advantage of.

Yeah.

Thank you, this question comes from William Bird from Smith Barney. You may ask your question.

Thank you. Terry, I was wondering if you could elaborate on your new initiative in the SAT market. Just overall, I was curious what your strategy is in the test prep market. And secondly I was just wondering if you had any preliminary thoughts on 2006 adoption state spending? Thanks.

Okay. All right. Well , first of all, you know, again, the opportunity for us and in the marketplace, is -- or 1 of the big opportunities in the testing assessment and reporting area, that's why we're so excited about the Grow Network addition as a wonderful acquisition that will add to our capability to provide a more integrated solution. As we do so, we're going to continue to expand into a lot of the nitch areas and one of them, Bill, is the, you know, obviously, the test prep area. And we're exploring that with the introduction of SAT Star 1, which is an entry into that side of it and we're going to continue to explore that kind of opportunity. Yeah, I on the 2006 adoption schedule, it's a, you know, obviously, it's going to be -- you know, there's a lot of, you know, opportunity here. You know, I saw where a particular entity came out with some very detailed forecasts on what was happening in 2006, I found that a bit interesting. And we're still worrying about getting through 2004 and what 2005 is going to be like. And we'll give some better numbers on how we think the 2005 adoption market, which is obviously, going to be very focused on social studies as well as health and a number of other areas, is going to go. But I think it's a little early to be talking about 2006 in specific numbers.

Thank you.

Hi, Terry, Bill Shelby from Gabelli.. All right. So forget 2006. But, just, please, look into 2005 with us and let's just look at the building blocks of the 3 businesses. Give us a sense of what you expect next year in terms of topline growth and margins.

Okay. Again, you know, from a forecasting standpoint we're obviously in the middle of all that right now. And, you know, what we have done in the past is usually by December give, you know, a little bit more specific guidance as to what we see in each other's markets. Overall, you know, the economic conditions, you know, here and the effect that they've had on outside regions and we believe will continue. We'll be in a low-interest rate environment, low inflation. We're going to see as business continues to pick up spending, you're going to see that, you know, influence job creation, which is going to help on the education side. It is also going to help in terms of some of the advertising factors on that one. I would see for an improved advertising environment on that one. You're going to see a continuation of a buildout in terms of our -- some of our important areas in our business to business category, in particular in terms of energy, which we believe is a, you know, is a terrific opportunity for us, building off of that platform. On the education side, obviously, the elementary high school market is going to be a much improved market. Higher education, as I said, you know, to add, is going to be, again, I think, another very solid grower for us, especially as we expand outside the United States. I look for the "No Child Left Behind", you know, funding to continue to propel McGraw Hill Learning group and, you know, as we expand here and the progress that we're making I'm very pleased with that. The testing assessment and reporting category is a major opportunity for us. You're going to see a lot of effort and focus there. We certainly expect to do well in a social study's adoption, both in the middle and in the higher secondary areas, but also, continue to improvement at Macmillan. We had a little disappointment this year, you know, on the Macmillan side of mathematics. We have put a lot of focus, a lot of attention into this particular group over the last couple of years and we talked about that. Even though we were a little disappointed this year where we are, I'm excited about where they are. This team has been changed, it's coming together, it's solid. We have got a big schedule ahead of us in 2005 and 2006 when we start getting into reading and I'm very encouraged about the progress that we're making there and I fully expect them to, you know, to contribute well. On the financial side, the part that I think is very encouraging, you know, I think we're going to see some terrific results, you know, on the rating's side. There'll be some shift in leadership, obviously. We'll need to see, probably, by sometime into '05, corporates and Sovereign's starting to pick up a little bit. But, the structured market, the mortgage-backed market, asset-backed market and that, I expect to continue to be strong here, Europe, Japan. But the areas that, you know, that are -- now we're starting to get a good deal of new contribution from that I'm excited about is on the -- on the non rating side. We're seeing it with the, you know, all of the indexes and the exchange traded funds. We're seeing it in Equity Research. Again, we've seen tremendous momentum there. As we get into the market and we're demonstrating our capability that we've been talking about, we're getting new clients, new customers and we're excited about that. And that's not just in the United States, that's, you know, a very broad component that way. We're excited about the Capital IQ platform. This is a technology and data platform that is going to allow us to leverage a lot of content, COMPUSTAT, indexes, a lot of our, you know, credit data, into a platform that can be customized to go -- to meet a variety of customer needs. So, this is something that is going to be very powerful. So, you know, I see strength in each of the segments. I see, you know, a good deal of contribution coming from some of the economic recovery that we expect to continue. And I just think, you know, it's just going to be a healthy, you know, a healthy environment for us. Now, the wild card always is is you got to execute and it's about people. That's the part we have to worry about. We're very focused. And we plan to go into next year with a very strong determination and with a better environment, you know, we'll have to see.

Thank you. This question comes from Lauren Fine.

Lauren?

Can you hear me?

Yeah, gotcha.

Okay. I believe last quarter you indicated that you thought the financial services segment would grow double digit top and bottom line for 2005 and yet you haven't reiterated that. I am wondering if that was just an oversight or if your outlook has changed? And then, I have another question.

Okay. Lauren, there's no change in that. And usually when there's no change, we don't restate it but I'll restate it. We're looking for double digit top and bottom line growth in the financial service segment next year.

Okay. And then I'm wondering if you could, quantify what you think the annualized revenues would have been in '04 if you had owned both Capital IQ and GROW for the full year. I'm trying to understand the 300 million that you paid for the 2 of them given that I think the revenues for the 2 of them are, you know, probably under 100 million.

I sort of sense, Lauren, a subtle message in the question. But -- .

No, they look like great acquisitions.

In this kind of market, you know, in terms of the kind of properties that we want to be able to attract, the bottom line is you're not going to steal anything on this one. We're excited about what GROW and what Capital IQ are going to do to help us to really penetrate in both the testing assessment and reporting market, as well as the financial information aggregation capability. And I -- it's hard to quantify it, you know, at this point, the extent to what that revenue growth can be. But it's going to be significant, obviously. They're both on very fast revenue and client attraction, you know, modes. But they -- one is a platform acquisition that will allow us to do a lot with things that we have as well as to extend, you know, a lot of the promise that they brought on. The other is a component acquisition that allows us to provide a more complete solution. One of the problems that "No Child Left Behind" has brought forward with the assessment area is that it's fine to tell you, you know, that you're below grade level or that you're not doing as well as you think you should be doing. And it's another issue to know what to do when you know that on on on that part. And so one of the things that we want to be about is to be able to provide, whether it's the intervention products, the remedial products, or whether it be the recognition of the skill sets that you're missing and how to go about workbooks and a lot of other things, how to do that, on that one. We want to be a part of improving that student achievement and GROW is going to help us to do that on that one. Both of these acquisitions, in my belief, if you look out a number of years and look backwards, are going to be significant acquisitions in terms of our ability to increase revenue growth but also, margin. But also, most importantly, customer penetration.

Is it fair to say that the revenues for the 2 were under 100 million for 2004?

Yes.

Okay. And then one last one. The Research settlement has clearly been a nice opportunity for an already healthy business that you were in.

I'm sorry, which one, Lauren?

The Equity Research settlement.

Right.

Can you give us a sense of with everything that you have been awarded to date, whether it was related to the settlement or not, what kind of annual revenues you would expect from that?

We're not breaking that out, Lauren. But I tell you that, obviously, with the settlement money, the significant incremental new money for '04, obviously, came from the settlement process. But, you know, for us, and as we've talked before about this, it is not about the settlement dollars. It gives us an opportunity to be able to showcase our Equity Research capability and to be able to provide that service. If, you know, the whole issue has been can you get to an improved business model for providing Equity Research? And the settlement dollar process, I think, gives us an opportunity, you know, to see if we can. So far, the early on 2004 initiative is very successful. I am very pleased with the momentum that we have and the direction that we've taken here. We're going to have to see over the next couple of years, does the market value independent, quote, independent Equity Research? I believe they do and it's only going to gain strength. But that has to be determined and my desire to be in that element of the business is going to be predicated on the fact that we can strengthen a business model, you know, to do so.

Great, thank you very much.

Thank you. This question comes from -- .

Yes.

Stand by, please.

The miracles of technology.

Thank you. This question comes from Peter Appert

Hi, Terry.

of Goldman Sachs.

You've enjoyed very significant margin improvement over the last 5 years at S&P so I have sort of a 3 part question. One is, is there more, meaningfully more upside in the margins within the S&P business unit or the financial services unit, rather? Two, what is the appropriate level or what's the upside, I guess, in terms of margin in that business? And then three, on a more short-term basis, can you talk about the sustainability of the margins at S&P if, in fact, we do see slowing new issue volume growth in '05 or even a decline in new issue volumes in '05?

The function of margins at Standard and Poor's is a function of the investments that have been made. You know, the coordination of their portfolio and the prospects for growth on that one. I think that, you know, what we are seeing is, you know, obviously, you know, a benefit of the investments that we have made all along. When we were in a much higher investment mode, we were giving guidance of about 30% margins there. We obviously finished the quarter at 40% and we're now committed to, you know, at least last year's margin. I think that's, you know, conservative guidance and I think that's good on that part. But, we fully expect from a growth standpoint, to benefit from capital market growth outside the United States. One of the things that we've wanted to do with the whole investment services area is to rationalize that whole initiative in a more completely and, you know, focusing on less smaller things and standalone things and to bring more aggregation and coordination to the group. I'm very pleased with where the index and exchange rate of funds initiative is. We've seen enormous growth here and we're going to keep a lot of pressure on that. I'm very pleased, as we just were saying to Lauren, about the Equity Research initiative here. But, the capital I.Q, acquisition, I think, when we look back at some point, I think it's going to be such a vital component, you know, to our future growth here and it's going to allow us to extend in a -- and much quicker and more effective way. And so, we're really looking from that standpoint. It's very hard to determine what an appropriate margin level could be, on that one. But, you know, the better part for me is that, you know, both in terms of organic and acquisition growth, I think that we have such tremendous opportunities and as the marketplace continues to, you know, be very vibrant, you know, I think that it really comes back to execution again. So, I would like to hope that, you know, we be able to maintain these kind of levels but we'll have to see what investment levels are like going forward and so forth.. I think it's a very attractive and a very appealing position to be in.

How about specifically the issue of cyclicality, then, Terry, going into '05 in the context of the possibility of declining new-issue volumes?

Well, you know, again in terms of market conditions at any given point in time, if we went into a much higher interest rate environment. If we went into, you know, some adventist locations around the world and stuff like that. It would, obviously, have an impact, you know, on our business and, therefore, it could have that affect. Absent that and, again, I couldn't be more pleased with, you know, the direction the Federal Reserve has taken and the leadership they've taken in terms of moderation. I think we learned a lot from the 1994 experience on that one. And I think, you know, all things equal, I think we've got a very good environment and I don't see, you know, any kind of major volatility. But, that would be subject to the absence of event sensitive risk.

Got it. Okay, one last thing with my margin obsession here. The Education segment in '05 in the context of what Bob said with the, obviously, higher preprint amortization costs, would the expectation be that we'll see the accelerated revenue growth in '05 but perhaps declining margins within education next year?

No. I wouldn't go there on that one. In fact, you know, we are playing for the 2005-2008 period. But 2005's going to be a very important year and we We would be definitely looking for contribution from that.

Great, thank you.

Terry, let me just add to that because I think I may have caused some confusion here. My comment with regard to the variability of costs on the sales marketing promotion, et cetera, really related to the absence of new programs. So, obviously, there's a variable component to it just as the amortization of prepublication cost is lower this year because of the fact we have lower programs. As we introduce those new opportunities for next year in this $900 million plus adoption opportunity, clearly, we expect to get our fair share of the revenue and the cost side of it -- the investment on the cost side, if you will, in sales marketing promotion will generate that higher level of revenue and higher level of profits. I don't want you to leave with the impression that our costs will go up and therefore our profits are going to go down. Obviously, we're making investments in sales marketing promotion, product development such to generate revenue and generate profits. But when you have the absence of those major opportunities clearly, your cost structure will be lower in that given year. So that was the only point I was trying to make.

In terms of planning when you talk about prepub expenditures, these are 2, 3 year programs that we're developing and obviously, 2005 programs, you know, have been underway for some time so there's a smoothing of that. Right, thank you.

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

Thanks, good morning. Acknowledging a strong upturn in 2005 for the new adoption sales, could you guys also elaborate on your expectations for open territory sales in 2005? Thank you.

Thanks, Brian. Yeah, I think that, you know, one of the factors that we are going to see this year, and it's still a little early to tell on that one, but, one that we're obviously watching very carefully, I think that we're going to see, you know, some nice growth in open territories in 04. I would fully expect, on a broader scale, that open territories in '05 would also be benefited from this pickup. So, I think we'll see some modest increase here.

Just an early stab, if you will, at what you think the total L-High market might be able to achieve in '05?

No, again, I -- it's a little early for us to give a, you know, a number on that one. I think that, you know, rule of thumb you can fully expect that we will be going after 30% of the total adoption dollars, as a rule of thumb. And we, obviously, hope to be better then that, on that one. But given our size and given the import of the disciplines that we're doing, we would be looking for somewhere there.

Thanks, Terry.

Thanks.

Thank you. This question comes from Frederick Scarby, J.P. Morgan. You may ask your question.

Hi, it's Frederick Searby from J.P. Morgan. Thank you, Terry. And it must be gratifying, these are nice results. A couple of questions. Can you help us understand, I mean, it's been very confusing when we do sort of proprietary checks how much is actually being disbursed from "No Child Left Behind" and obviously, you have a strong position here in testing and should be a beneficiary. You indicated that it's helping your education business and the numbers were clearly, well our expectations. I'm wondering if you could maybe quantify how much, you know, of the dollars in education in this quarter and what you're expectation is in terms of "No Child Left Behind" now, as we're starting to see some of this implemented? Secondly, global transformation project, you've said, you know, you've finished putting it on one kind of digitalized platform in the U.S. and now you're rolling out international. The margin expansion have we largely -- how much have we seen of that and how much is that contributing to margins in education? Those would be the 2 things.

Sure. Thank you for the comments, Frederick. Yeah. It was a couple of areas like residential, higher education and "No Child Left Behind", that, you know, coupled with good expense control gave us a unique opportunity and I'm pleased that, you know, 2004, now, looks in the position and the condition that it does. It's pleasing. With "No Child Left Behind" , you know, the Don Rubin model of badgering every single state and trying to figure out exactly where everything is a tremendous work in progress. There is a real lack of transparency about where these dollars is. What I can tell you is that in terms of "No Child Left Behind" products, products that, you know, like Every Day Mathematics, Impact Mathematics, Open Court Reading, these kinds of products that are a part of standardized instruction and focused on improving student achievement in urban markets are going up very strongly for us. The McGraw Hill Learning group, which is a "No Child Left Behind" group, is far outpacing our peers and it's doing so because we have a focus right on those funds. So, we have seen a really good increase of that activity there. The other thing, Frederick, that "No Child Left Behind" is doing, it is giving, clearly, more focus and more energy at both the state and the large city level. And therefore, we're seeing additional spending at the state and in the large municipalities, you know, coupled with "No Child Left Behind". So, there is a focus and there is a momentum to this that I think is taking place and as we start getting towards Federal, you know, mandatory assessments in 2005, 2006, I think there's a lot of concern at this point on where some of those results and what some of those results are going to mean. So, there's an awful lot of coordinated activity and, I think, that is where, you know, the urban markets are benefiting. Certainly, that's where we are, on that part. But, for us, you know, we know that Federal funding has helped us in every quarter this year. We know what the size of it is. We know what has improved, been approved by grants to the state. We know the process by which the states are working with the local education agencies in terms of dispensing, but, again, you've got so much fragmentation in terms of decision making that it's hard to quantify a singular number on that part. We just know the aggregates and we now know that with a third year complete another $1 billion monies are there, Now, again, remember about half of that is for professional development of teachers, about 20 to 30% for educational materials and another 20% for testing and assessment. And so, we have to be very focused in terms of where we can, you know, align ourselves to benefit from that part of it. With global transformation project, and in terms of margin, the answer is, no. It is not improving and helping margins at this point. It has to be, you know, what we are ultimately able to achieve. What we've been talking about and again, it's a little difficult with the down education, K-12 market this year, is we want a solid 15% margin. We believe that this segment should be a 20% margin business and we've got to get there. There are components that are obviously, much higher then that. And then, as we start getting into a lot of the digital transformation and the like where you can significantly reduce printing, binding, paper costs and all of those kinds of things, we should be able to do more then that. The trip we're on now is to get to a 20% margin. I believe that over the next couple of years that the effect of the global transformation product is and should be able to provide, you know, margin support, on that part. It will be something in terms of cost saving that we'll keep in front of us as we go. At this point, obviously, you know, it's been more investment and, therefore, it's held back those margins a little bit.

Thank you very much. By the way, I sat down with Capital IQ and I thought it was a really slick product set so we're excited there as well. Thank you.

Thank you, Frederick.

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

Hi, it's Brandon Dobell from First Boston. Just a quick one, Terry. In terms of the presidential election and how that might impact some of the particular programs in education, I guess, I can apply more focus on the ones that matter, I think, the most in the next couple of years which are reading and testing. Let me get your thoughts on what you could -- what we might expect if there is a change in administration or if there isn't and if our states still kind of looking at some of these unfunded mandate issues trying to figure out how to get around some of the funding gaps between what the Federal government giving and kind of what they need to provide.

Okay. Thanks, Brandon. Well , you know, clearly, when you take, it's hard, I know, the politics out of all this and the partisanship and whatever and if you step way back and take a look at what's happened, one of the landmark pieces of legislation that will be credited to President Bush is the governor's sponsored bill of "No Child Left Behind". It's, you know, it has been a long awaited and finally, in terms of our own economic growth and the size and the skill sets of developing your own workforce, you know, the importance of an education system in doing that, is so vital. And, you know, one of the problems that we have faced over the last 4 decades is all this fragmented thinking on how to approach the whole learning capability. And so what "No Child Left Behind" has done is to put, you know, an umbrella over all the capabilities, it's brought focus and it's brought funding. I don't think that any, you know, change in administration will change anything having to do with the promise that "No Child Left Behind" and the coordination with states and large municipalities has created. You can argue about funding, you can argue about, you know, stressing one component at a faster rate and the like. But what has fundamentally changed is the importance that education has taken on as a contributor to economic growth because of the affect that it has on workforce development. High skills, we pay high wages now for high skills, not for low skills. Therefore, it's what you know that counts. That rhythm in our marketplace has taken on strong. Interestingly, as we travel, you know worldwide, you know, you've got a very clear focus and in terms of a lot of countries that are following this very, you know, model. We see it in Mexico what we're doing very well. We're starting to see it in Central Europe, in particular in Poland and Hungary and Czech Republic. We're certainly seeing it in China, on that one. So I think that the importance at this point is what has been started is so important that it will not be pushed back regardless who's in the White House. And therefore, this really is an apolitical issue, it is one. But it really isn't and I think that when cooler heads and all of those kind of things I think that, you know, we'll be very fine. Now, we will be tested on our courage and our will to maintain this. The elementary and secondary education act of 1965 was very similar to what "No Child Left Behind" was about and we abandoned it and we paid the price. Now leaves practically 40% of our young people behind, on that part. We can not do that, we can not afford to do that with the kind of worldwide competition that we're going to face going forward. You know, my guess is that from a presidential standpoint, that these kinds of issues are talking points at this point, but the direction is very clear and we have to have the courage and will to stay with it.

Okay, thanks, very helpful. Then one quick one. Maybe a little bit more clarity on what the business model for the Grow Network looks like. Is it kind of like the testing market where you get paid for every, you know, test scored or booklet created? Or is it more of a macro-contract with the district over the state?

It is, at this point, you know, their model has been one of winning contracts. What they have been able to purport is the capability to, in a very fast form, to be able to produce customized for each individual results of how you did on a test and what you need to know to be able to retake that test and to do well and a workbook that gives you all the capabilities to hone those kinds of skills. Now, they've been able to win contracts doing that and the biggest one that we just won was the one I mentioned in Texas on that part. We will continue to be able to provide that capability for any state requirement. The power is going to be in terms of our collective ability to -- and to be able to say, we cannot only on the summative and the formative side provide these tests, we can also be able to have a combined solution for you that would be priced in such a way it would be beneficial to them as well as to ourself. But the most important part is that, you know, the student is going to be in a better position to achieve.

Okay, thanks a lot.

Thanks.

Thank you, we have 2 more questions. Our next question comes from Steve Barlow, Prudential, you may ask your question.

Thank you. Bob, I wonder if you can help us with what the affects of currency were in the quarter. And then, a second question. You talk about the adoption lists are all being formulated for 2005. Where have you not made the list?

Okay. Steve, first let me give you to Bob on the currency.

Steve, with regard to the currency, the total impact for the quarter was, in terms of revenue size, is $10 million. So it effected the overall growth rate by a modest amount. Where the impact came from, mainly, was in education and financial services. The education growth of 2% would have been effected by about 0.5 a percentage point from currency, so growth without currency was 1.5%. In financial services the 14.1% growth would have been adjusted by approximately 1.3% due to currency.

And is there a net EPS effect for the Company?

No. Actually, no there really wasn't because there was offsetting influences in the particular location, especially in the UK European theater where our largest installation, where we incur our cost in pounds and a number of our billings now are predominately in Euro so there was offsettings. So the impact on the bottom line was pretty negligible.

And Steve, as far as adoption activity that's going on, I'm not aware of any dislocations in terms of being approved by state. We're focused, obviously, of next year with math and Louisiana, Tennessee, Virginia and West Virginia, all of that southern part. The big one, obviously, is social studies in the southeast, in particular, and the southwest. These are all on the elementary side, as well as health. On the secondary school schedule, again, it's the southeast and southwest that will be focused. You'll see some math but a heavy social studies and also in the sort of, you know, other category of art, music, drama, speech and world languages. Those areas combined, if you will, are also going to have some very strong southeast/southwest representation. And we're in the process now of going through those adoption capabilities.

Okay. And if you had to choose who your most feared competitor is for 2005, as you look at the other companies' offerings, who would you think is the toughest competitor out there that may give you difficulty reaching the 30% adoption share you normally gather?

Well, you know, I've respect for, obviously, all of our competitors. And, you know, they are very good and they have a lot of capabilities as well and all I can concentrated on is what we do in this thing. And I'm pretty pleased with where we are and what I think we're capable of doing. But, again, on the education side I'd love to have 100% of the market, but, you know, I think in terms of new adoptions the rule of thumb that we were saying about 30%, I'd like to do a lot more than that, in that part. So, you know, again it falls all the way back to execution and our capabilities. But, the market has consolidated on the education front and it's -- and there's a, you know, they're good players on that part. I just think, you know, we should be doing pretty well and I like our opportunities. More broadly for the corporation, it's hard to pick, you know, one competitor to benchmark against. In both the capital markets, education markets, and the media markets they are all a little bit different. What I focus on is, you know, obviously, you know, what we can do and the total shareholder return and I know that our total shareholder return is higher than any of our peer proxy folks and better than the market. And I like being in that kind of a position

Thanks, Terry and Bob.

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

Thank you all very much.