標普全球 (SPGI) 2005 Q1 法說會逐字稿

Good morning and welcome to the McGraw-Hill Company's McGraw-Hill first-quarter 2005 earnings call. [OPERATOR INSTRUCTIONS] Donald Rubin, Senior Vice President Investor Relations of the McGraw-Hill Company. Sir, you may begin.

Good morning and we thank you for joining us here at the McGraw-Hill headquarters building as well as those who are on the phone and listening abroad and on the Web. For the McGraw-Hill's first-quarter 2005 earnings conference call. I am Donald Rubin, Senior Vice President Investor Relations for the McGraw-Hill Companies. With me this morning is Harold McGraw III, President, Chairman, President, and CEO and Robert Bahash, Executive Vice President and Chief Financial Officer of the corporation. This morning we issued a news release with our first-quarter 2005 results. We trust you all have had a chance to review the release. If you need a copy of it and the financial schedules, they can be downloaded at www.mcgraw-hill.com/investor_relations. Again, www.mcgraw-hill.com/investor_relations.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risk and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct investors 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 would ask that questions from the media be directed to Mr. Steve Weiss in our New York office at area code 202-512-2247, subsequent to this call. Today's update will last approximately an hour. After our presentations, we will open the meetings to questions and answers. It is now my pleasure to introduce the Chairman, President, and CEO of the McGraw-Hill Companies, Terry McGraw.

Okay. Thank you very much, Don. And good morning to all of you and thank you for joining us this morning. And if you are listening to us by Web or telephonically, we welcome you as well. These are an exciting couple of days for us. Today we announce our first-quarter earnings. We have our normal Board of Directors meeting tomorrow. We also have our annual shareholders meeting tomorrow. I do hope that if you are in the New York area, we'll be -- we'll hold our annual shareholders meeting at 11:00 in the McGraw-Hill auditorium on the second floor of the McGraw-Hill building, and we would be delighted if you were there. There is a wonderful product display in the gallery adjacent to the auditorium that I think highlights a lot of our products, but also a lot of our young people that are doing all the hard work in developing those good products, and we would love to see you there as well.

So good morning, again, I am Terry McGraw, I'm Chairman, President, and CEO. With me as usual is Bob Bahash, our Chief Financial Officer. I am going to make a few remarks about the first-quarter results, and then Bob will make some comments about our financial situation. And after that, we will be available to take any questions or hear any comments that anybody would like to make. As far as the first quarter is concerned, We are under way, and we are very, very pleased with the -- with the yearly results.

Let me begin by quickly recapping the highlights of a very strong first quarter. Revenue increased 11.9%. Diluted earnings per share from continuing operations grew $0.41 versus $0.39 for the same period last year. But as we noted in the earnings release this morning, the $0.39 from last year includes the noncash benefit of $0.10 per share from accrued tax liabilities in 2004. That means on a non-GAAP basis, we produced a 41.4% increase in earnings per share in the first quarter, and that's after -- that's after $0.02 of dilution for the acquisitions last year of the Grow Network and Capital IQ.

Given the seasonality of our business, the first quarter is small, but clearly the year is off to a good start, and we think that there is more good news ahead. We expect to continue operating in a growing economy with interest remaining low by -- interest rates remaining low by historical standards. David Weis our Chief Economist at Standard & Poor's expects gross domestic products here in the states to grow about 3% this year, maybe a little bit more. He also expects the Federal Reserve to continue its measured pace, quarter-point hikes at its meeting on May 3, but as the economy shows signs of acceleration and there may be some movement in inflation, the Fed could move to 50 basis-point hikes perhaps as early as the June meeting, but we expect -- we were expecting about 4% Fed funds rate by the end of the year and given the way the economy is growing, we would probably say now that it might be a likelihood of about 4.25% by year end or just into 2006. Either way it's a low-interest rate environment. While interest rates are a factor in the ratings business, so are economic growth, capital spending, debt, finance, M&A activity and so forth. As long as the economic growth continues and spreads remain tight, an increase in interest rate will have very little impact on our results.

The funding outlook for education remains positive, and is actually getting stronger. As this chart shows, state budgets are back under control as revenue, again, tops expenditures. In nearly half the states, tax collections are beating forecasts, and that's according to a recent report from the National Conference of State Legislators. There is growing demand from some states and the National Education Association for more funding to meet No Child Left Behind requirements. That led last week to a federal lawsuit, the NEA in some school districts charged that the Department of Education has not provided the funding necessary for fully implementing No Child Left Behind. It is possible that congress may respond to this growing pressure by increasing the Department of Education's budget for the new fiscal year on October 1. The implications obviously for us would be positive if even more funding reaches the market.

From our perspective, funding for key programs, Early Reading First, Reading First, and formula grants to pay for developing standards and tests are reaching the market as expected. In the midst of controversy, the Department of Education has relaxed some of the requirements for measuring adequate yearly progress. For example, there are new exemptions for disabled students . We will have to see if more will be done by the Department of Education and faces some of these pressures. But in all cases, the strength of No Child Left Behind and the importance that it has in the education reform movement is not in question. With that as background, let's review the outlook for each of our business segments.

Let me begin with McGraw-Hill Education. Here, revenue grew 7.3%, the operating loss increased 14.4%, and the operating margin declined by 2 percentage points. Revenue at our School Education Group increased 12.6% to 148 million. Revenue at our Higher Education professional and International Group was up 2.8% to 159 million. In evaluating these results, consider four key points: First, We are ramping up our investments in people and products to prepare for some very good years in education. Certainly in 2005 but not just in 2005, but in subsequent years as well. Secondly, that the added costs have a disproportionate impact on our first quarter because it is so small. Historically the first quarter is by far education smallest each year, 10% or less of the annual result. That simply reflects the seasonality of the education market. Thirdly, by the time 2005 is in the books, we do expect to achieve some year-over-year operating improvement in this segment. While it is still early in the year, we are very encouraged by the revenue increase in our School Education Group that has started to generate with its new programs.

Let's take a look at these points a little bit more detail. McGraw-Hill Education added to its editorial production, sales and marketing teams in the second half of 2004, and that was to prepare for the bigger years just ahead. Hiring and the acquisition of the Grow Network produced a 4% increase in headcount in this segment when the first-quarter of 2005 is compared with the same period last year. Obviously compensation costs grew, but it should be just as obvious that these costs won't have the same impact in the second half of this year.

We're in the key selling season and sales and marketing costs have risen as we educate potential customers on the benefits of our new products. We are also investing in technology to streamline our systems and to create new products and capabilities that will give us a competitive advantage in the future. In testing, for example, we are preparing for more growth by adding capacity with the expansion of our scoring centers in Salinas, California, and Delran, New Jersey. New product enhancement and new product releases are scheduled this year including the launch of an online version of our successful Terra Nova test. As our formative testing business grows, we are adding to the scale and to the scope of the new I Know product suite.

We are also starting to benefit from the acquisition of The Grow Network last year. As states prepared to meet the new public reporting requirements on test results as mandated by No Child Left Behind. They are requesting separate bids for reporting. The Grow Network won contracts last year for reporting in Nevada, Pennsylvania, and since we acquired them, in Ohio. That's three opportunities and three wins. The Grow Network expects to announce a fourth win shortly.

And speaking of new contracts, the Florida Department of Education announced yesterday that it is naming CTB McGraw-Hill as the prime contractor for the Florida Comprehensive Assessment Test or FCAT. The three-year contract is worth $82 million and comes with a two-year 58 million option to renew that would carry the business through 2010. And we are obviously very, very pleased with that development. This is a -- by the way a large scale assessment program that meets the requirements of No Child Left Behind. The FCAT covers reading and math, grades 3 through 10, writing, grades 4, 8 and 10, and science, grades 5, 8 and 11. Approximately 1.8 million students will take the FCAT exams during the current school year.

We will manage and distribute the test books, process and score the tests and manage the development and delivery of the score reports. The Grow Networks innovative reporting system was a very important factor in capturing this new contract in Florida. The customized study guides produced by The Grow Network for Texas students have been publicly praised by Governor Perry and Doctor Shirley Nealy, the state's Education Commissioner. The guides were recently highlighted by the National Governors Association in its new publication "redesigning the American high school."

Earlier I pointed off that we are off to a good start in the elementary and high school market. Historically the first quarter represents about 7 to 8% of the industry's annual revenue, so a good start is a good signal, but you can't base your whole year on that. We expect the elementary, high school market to grow by 10% or more this year. We are encouraged by developments in both the adoption state and the open territories where a range of opportunities will give us an opportunity to leverage our depth and our breadth of our product offerings. Social studies offers the biggest new state adoption opportunity this year and our new middle and high school programs are off to a good start -- a good start in Florida and in Alabama. That positions us to lead in the high-volume secondary portion of the state's new adoption market.

Elementary and secondary science programs are performing very well in North Carolina. Our elementary program was selected by Charlotte Mecklenberg, North Carolina's largest school district. Spotlight on Music a new elementary school program is showing strength in open territories and new state adoption. In health, we got off to a very good start in California when the Los Angeles unified school district chose our programs for use in the elementary and middle school grades. Our alternative basals, Open Court Reading and Everyday Mathematics are capturing sales across the country. They have been having terrific results. Reading First, a key program created as part of the No Child Left Behind Act was again a source of incremental revenue for us in the first quarter. And that should continue.

Growth in Higher Education and professional markets was key to the performance of the Higher Education professional and International Group in the first quarter. Higher Education products sold well, both here and abroad. We still expect the U.S. College and University market to grow about 3 to 4% this year, and we are encouraged by the early results. All three major imprints, Business and Economics, Science Engineering and Mathematics, and Humanities, Social Science and Language started the year on a positive note. We are continuing to secure new business in the for-profit post secondary market. There's a more fully developed appetite in these schools for incorporating our content in their electronic libraries and we are successfully meeting that demand.

In the professional markets, the latest addition of Harrison's Principles of Internal Medicine continues to sell well. The 16th edition of the word's best-selling medical text was published last August, we're also enjoying success with a new edition of Harrison's Manual of Medicine. We are also getting good early results with DEL, that's our Digital Engineering library. DEL. This is another example of how we are leveraging our print resources to expand our customer base. This new online service offers content for more than 150 McGraw-Hill publications and more than 4,000 engineering articles. This is a global product, priced to sell both in academic, as well as corporate markets. Prices range from $2495 annually for a single concurrent user to $9995 annually for unlimited users.

So summing up the McGraw-Hill Education segment, Solid early indications of a strong sales year in 2005. We expect the LI market to grow by 10%. We expect the U.S. College and University market to grow by 3 to 4%. Operating margins are expected to grow later in the year. A really good start to the year.

Let's now go to the financial Financial Services segment. Financial Services record in the first quarter was an outstanding performance. Revenues grew by 19.9% . Operating profit increased 28%. The operating margin expanded to 40.7%. These results represent a strong top-line performance and some prudent expense management at Standard & Poor's major business lines. We expected solid growth overseas in ratings, and we got it. We expected solid growth in ratings that are not tied to new issue volume, and we got it. We expected solid growth in the U.S. market for ratings, and we got it. And we expected solid growth in investment products and index services, and we got it.

Structured finance was an important driver globally in the first quarter. In the U.S. market, we started the year with a good pipeline of residential mortgage backed securities even after the record performance of the fourth quarter. The momentum continued throughout the first quarter. As a result, residential mortgage-backed security issuance increased by 67% and set a new record for the first quarter.

The pipeline going into the second quarter looks pretty good too. But the comparisons would -- or I guess I should say "should" get tougher as the year progresses. As this table shows U.S. residential mortgage-backed securities issuance increased every quarter last year on its way to a new record. We don't anticipate a repeat of that performance this year, but given the early strength of the residential mortgage-backed securities market and tougher comparisons in subsequent quarters we now expect issuance for the year to decline roughly 15%. We said 20% declined last time. We will say 15% now. My -- my record here on forecasting residential mortgage-backed securities issuance has not been good, and it could even be a better number.

We also saw record issuance in the first quarter of commercial mortgage-backed securities. Investor demand for them has been strong since they represent high-quality instruments that produce better returns than AAA rated corporate. This was a shift that we had been looking for and we are very pleased to see it and coupled with a strength on the residential side it has given us some very good strength. All of that adds up to a better outlook for the mortgage-backed securities in the U.S. market for the year.

There was also a strong investor appetite for U.S. collateralized debt obligations, CDOs in the U.S. and in Europe. The asset-backed business flattened out in the first quarter and faces significant decline in credit issuance. Auto loans, students loans showed some strength and we expect credit card issuance to increase for the full year. As a result, we look forward to a pickup in the asset-backed market. The U.S. corporate market was soft, but surveillance fees and annual contracts helped us keep moving ahead. We currently don't expect much, if any growth, in U.S. corporates this year, but we anticipate good growth in Europe.

Strong refunding volume was a key to the growth in municipal finance in the first quarter as public officials optimistically came to the market to take advantage of low interest rates. In looking ahead, we still expect International and nontraditional rating products will continue to be the pace setters. International represents, again, just over 34% of the first-quarter revenue from ratings. We expect securitization to be an important factor in subsequent quarters with growth across most asset classes in Europe and in Asia, most notably in Japan. Nontraditional ratings account for about 21% of ratings. We anticipate more solid growth from structural finance derivatives, counter party credit ratings, bank loan ratings, and financial strength ratings.

Elsewhere in Standard & Poor's, there is also good news. We continue to build revenue and expand coverage from firms participating in the global research settlement. Recently both Citibank and Morgan Stanley requested substantial increases in research coverage provided by Standard & Poor's. We have also picked up new business from one of the firms recently added to the global research settlement.

We continued to leverage our index products and services on a variety of fronts. Custom indexes are one of the fastest-growing new businesses. We have created approximately 50 new custom indexes in the first quarter. These include an infrastructure index for a major investment bank, a tier group index for a large U.S. company, an index for a U.S. Investment manager specializing in socially responsible investing. We are also adding new customers on our S&P Citigroup indexes. Derivatives based on S&P indexes continued to grow. On January 10, the six option exchanges for the first time started trading option contracts based on the Standard & Poor's depository receipts, Spiders. In the first quarter they traded more than 7 million contracts.

At the same time, we saw continued growth in the trading of contracts based on the S&P 500. In the first quarter more than 13.5 million contracts were traded, an increase of 39% for the same period last year. And we get paid each time a contract is traded. That is the part I like the best. Assets are under management and exchange traded funds based on S&P indexes and they also continue to grow. At the end of the first quarter, there was $113.4 billion under management, a 39.5% increase over the same period last year.

As part of the S&P's portfolio advisory services, we develop strategies for clients based on stock and fund selection, asset allocation, and a number of proprietary investment ideas. Working with JP Morgan's derivatives desk in London, we helped Banco Sandidar the largest bank in Spain create a structured notes based on a basket of U.S. and European equities rated 4 or 5 stars by Standard & Poor's equity research analysts. The S&P all-stars note guarantees investors a return of their principle, plus a yield tied to the performance of the stocks in the basket. S&P is paid a fee based on the total amount of assets raised by the bank. The more money the bank raises, the more successful S&P will be. To date the bank raised more than 3 billion Euros in this product. Other financial institutions are interested in deploying the same or similar strategies in other markets.

Capital IQ, which we acquired last September is beating our expectation and has a strong pipeline of potential new deals. The integration of back office functions and day-to-day operations is complete, and we have merged the sales organizations that support Capital IQ, as well as Compustat. In March Capital IQ launched the industry's first global database of auditable public company fundamentals. The next release will contain content from other parts of Standard & Poor's which will make our offerings even more compelling. On April 1, S&P closed deal to acquire Vista Research, the goal here is to expand S&P's already extensive equity research platform by capitalizing on the growing demand for primary research services and add to our business in the mutual and hedge fund markets.

No report, I guess, on Standard & Poor's would be quite complete these days without a comment on the regulatory environment. It is a much-improved situation. Just a few days ago on April 19, the Securities and Exchange Commission released for comment a proposal for defining nationally recognized statistical rating organizations and our SROs in order to increase the transparency of the SECs designation process. We have always supported the efforts to make the SECs NRSRO designation process more transparent. We think the proposed new rule is a very positive step, and we will be providing comments to the like to the SEC.

We were also very encouraged by SEC Chairman Donaldson's recent testimony before the Senate Banking, Housing, and Urban Affairs committee. He expressly acknowledged that any proposed regulatory framework for rating agencies would raise important issues under First Amendment. We should also note that on March 31, 2005, the Committee on European Security Regulators or CESR, after receiving substantial input from the market participants, recommended that rating agencies should not be regulated. Instead, CESR recommended rating agencies should implement and enforce internally a code of conduct and other policies to address key issues.

I think everyone knows that Standard & Poor's last fall published its own code of conduct that is broadly consistent with the International Organization of Security Commission's code of conduct fundamental, that's IOSCO. In fact Standard & Poor's works very closely with IOSCO in the draft of that IOSCO code. We continue to work closely with the SEC on a voluntary oversight framework for rating agencies and we are making good progress in this front. In short, I think there is greater understanding today on the role of rating agencies in the capital market, and the markets need for on a global basis for objective, independent opinions. And that's good. We continue to believe that there will be no material adverse change in any way to Standard & Poor's conduct of its business.

So summing up for the Financial Services segment, double-digit top and bottom-line growth for the year. Operating margins that will be similar to last year. International and nontraditional ratings will be this year's pace setters. More growth in providing products and services to the equities market.

And finally let's take a look at our Information and Media Services segments where revenue declined 1.3%. Operating profit decreased 65.2%. The operating margin declined to 3%. The results here reflect a combination of three factors. A decline in advertising revenue, increased sales of information products and services, and investment to position us for future growth.

Let's start with the advertising picture. The decline in advertising can be mainly attributed to softness at BusinessWeek, where ad pages in the first quarter were off 11.5% as measured by the Publisher's Information Bureau. The absence also of political advertising in an off election year and reduced network compensation which offset gains in local sales at Broadcasting. Revenue for our Broadcasting Group declined by 2 percentage points to 24.2 million. Event driven declines in the aviation market also were a factor. Last year, we benefited from major air shows in the first quarter. There were no comparable -- comparable events for this year.

In April, after four issues, BusinessWeek's ad pages are off 10.4% for the month as high-tech and financial service advertising continued to lag. Year to date, the publication trails last year by 95 pages in the North American edition or about 11%. In recent years, we have seen advertisers hold off programs until later in the year. That is certainly true last year and BusinessWeek finished the year with a solid fourth quarter. The pattern appears to be repeating itself for 2005. We still expect improvements in the second half of this year.

In the construction market, there were start-up costs for the launching of two new magazines, Constructor, which will publish five times this year for the American General Contractors of America's 38,000 members. And also My House, an upscale residential publication for regional markets. There is also increased advertising at Architectural Record and Engineering News Record. We continue to add subscribers in our construction and energy markets even as we make investments to strengthen these platforms. In the energy market, the volatility of oil and natural gas prices are driving demand for our news and pricing products. And the McGraw-Hill construction Network's new bid management module is starting to win new business and build a pipeline of potential customers.

On April 1, we competed the acquisition of J.D. Power and Associates. Probably best known as the leading provider of information to the global automotive Industry. J.D. Power have established a strong and growing presence in finance, insurance, health care, home building, telecommunications, and energy. We believe the acquisition will enhance growth prospects for our business information platform by providing a new direct link to consumers. We also will move rapidly on new collaborative opportunities with some of our franchises that will include Standard & Poor's, BusinessWeek, energy, construction, and aviation.

We obviously are not satisfied with the operating margin decline in the first quarter. We will take necessary cost containment actions to improve the performance in subsequent quarters should revenue fall short of our expectations but we are expecting revenues here to improve, especially in the second half of this year. Therefore summing up for Information and Media Services, continuing growth in high value-added information products and services. Operating margins will recover in subsequent quarters. We are still expecting a pickup in advertising in the second half, and so with that, that completes our review of the three operating segments.

Let's me sum up for the corporation. We are very pleased. We are off to a very good start. We are excited about our prospects for the rest of the year. As we have stated previously, We expect high single-digit growth and earnings per share from continuing operation and that includes $0.16 to $0.19 of dilution from acquisitions last year, recently announced acquisitions in 2005, and changes in the pension plan assumptions for 2005. But excluding the 2004 noncash benefit of $0.10 per share from the accrued tax liability. We continue to aspire to double-digit growth in 2005.

That concludes my comments. At this point, let me turn it over to Bob Bahash, our Chief Financial Officer, and then we will go to your questions and/or comments. Bob?

Okay, thank you, Terry. I want to start this morning by reviewing our share buyback program. In January, the Board of Directors reaffirmed its commitment to an expanded share repurchase program. The goal in 2004 and again in 2005 is to buy back 3 to 5 million shares. In the first quarter we acquired 3.6 million shares at a cost of 318 million. 5.3 million shares remained in the program the Board authorized in January 2003. The diluted weighted average shares outstanding for the first quarter was 193 million shares. That's roughly flat when compared to the fourth quarter of 2004, despite the strong level of share buybacks. The reason you haven't seen a decline is the timing of the share buybacks. Most of the repurchases were done in March. Since they were back-end loaded in the quarter their full effect will not be evident until the second quarter. The Corporation remains committed to the share buyback program of up to 5 million shares in 2005.

As you've heard, we have completed two acquisitions on April 1, J.D. Power and Associates and Vista Research. That brings our year-to-date acquisition investments to 420 million. As we previously stated, For the full year, we are anticipating dilution of $0.16 to $0.19 which will come from three sources: 2004 acquisitions of $0.05 to $0.06, 2005 acquisitions of $0.06 to $0.07 and pension plan assumption changes of $0.05 to $0.06. Now dilution will not fall evenly in each quarter this year. For the first quarter of 2005, we had $0.03 dilution from -- essentially from the 2004 acquisitions and pension plan assumption changes. The biggest impact comes in the second quarter of 2005. We expect dilution of $0.08 to $0.09. That's mainly due to the seasonality of J.D. Powers business as well as integration costs. For the second half of 2005, dilution will be less than -- will be about $0.05 to $0.07 which will have much less of an impact. By 2006, these acquisitions will be cash positive, and we are forecasting now that they will dilute 2006 earnings by only $0.03. Virtually all of this dilution will be from amortization of intangibles.

Our cash position at the end of the first quarter of 2005 was 361 million, which is 320 million -- which is a 320 million decline from the 2004 year-end level. The decline is the result of a number of significant payments in the first quarter for the share repurchase activity, dividend payments, and increased working capital levels as McGraw-Hill Education prepares for a significant adoption year. Since we were essentially debt-free, we had a very small amount of interest expense in the first quarter. It was about 700 million, down 60% from the year ago. But as a result of recent acquisitions which closed at the beginning of the second quarter, and the step-up in share repurchases, We have returned to the Commercial paper market for -- for some short-term borrowing. As a result, interest expense will increase somewhat in the second and third quarters. By this fall, we expect to return to a surplus cash position. Over the year, We are projecting net interest expense at approximately 12.5 million.

Now let's look at corporate expenses. Corporate expenses decreased in the first quarter by 17% or 4.7 million to 23 million. The decrease is due to the elimination of duplicate rent expense associated with last year's office consolidation in Canary Wharf. For the full year we expect only a modest increase in corporate expenses compared to 2004. We continue to study the repatriation incentive under the American Jobs Creation Act. Under this provision, we could repatriate between 150 and 200 million at an incremental tax cost of 4.5 million to 6 million. Now we will finalize this later this year.

We now have a date to start expensing stock actions. On April 14, the SEC changed the compliance dates for FASB statement 123R. Under the new rule, companies are now required to implement the accounting rules by the beginning of the next fiscal year that begins after June 15, 2005. With the December 31, fiscal year end for McGraw-Hill, we will implement the new rules starting January 1, 2006.

Let's now review capital expenditures which include prepublication investments, purchases of property, plants, and equipment, and additions to technology projects. Our prepublication investments were 49 million for the first quarter of 2005 which is 13 million higher than the same quarter last year due, of course, to the excellent adoption opportunities in both 2005 and 2006. For 2005, prepublication investments are projected to be 270 million. Purchases of property and equipment remained relatively flat in the first quarter at 17.5 million compared to last year. And for 2005, we expect 130 million for the full year. Additions to technology projects sold only 1 million in the first quarter which is a decrease compared to 4.3 million for the quarter last year. The primary reason for the decrease is lower global transformation of project investments. Now for 2005, we are projecting 30 million as we increase our investments in several other projects.

Let's now review the noncash items. Depreciation for the first quarter was 25 million. For 2005, we expect about 110 million, reflecting the higher level of capital expenditures in 2004, mainly for short-lived technology-related equipment, as well as 2005 capital expenditures. Amortization of intangibles for the first quarter was 8 million. For 2005, we now expect about 49 million, which is an increase from our earlier full-year estimate of 38 million. Of course, the increase is being driven by the recent acquisitions. Amortization of prepublication costs for the first quarter was 25 million. For 2005, we continue to expect about 250 million.

We continue to make progress with McGraw-Hill's Global Transformation Project or GTP. GTP provides a common platform for order to cash processing which encompasses order entry through revenue recognition, receivables, management, and customer payment. We completed the North America platform of GTP in 2004. There are now several initiatives that can be pursued including the consolidation of platforms for International units and reporting enhancements around sales management, customer service, and inventory management. The total global transformation project cost remains at 180 million. We have spent about 156 million so far of which 70 million has been expensed. For the first quarter of 2005, GTP impacted operating profit by 7.5 million versus 6.6 million in the same period last year. We plan to complete the International units during the 2005, 2006 period through a combination of the Oracle platform and for certain regional areas of consolidation within their existing platforms. We will then be in a position to begin to realize the benefits from implementing this system on a global basis. Thanks and now back to Terry.

Okay. Thank you, Bob. And so that concludes our comments on the first quarter. Off to a very good start. We are very pleased. Once again, I would remind shareholders that our annual shareholders meeting will be here -- here at McGraw-Hill building tomorrow starting at 11:00, and we would love to see you if you are in the area. Other than that, it will also be Webcast, and you can gain it that way as well. Back to you, Don.

Thank you, Terry. Just a couple of instructions for our guests here in the meeting room. Please use the microphone when asking your question so that our phone participants can also hear the questions. Be sure to state your name and your company please. 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 your question, simply press star 2. If you've been listening through a speakerphone but would like to ask a question, we ask that you 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 will start with any questions there may be in the room.

Clarence Senias, Clawson Investments. I was just following your comments on acquisitions. And the -- I was wondering whether -- should we have an update in terms of the acquisition strategy going forward? Are we looking at anything new? Are we just satisfied with what we have right now? And if we are looking at anything new going forward, what are we looking at in terms of size?

Okay. Thanks for that. Again, acquisitions aren't scheduled at any given point in time. We like to look for tuck-in acquisitions that will either strengthen an existing platform or create a platform that can link existing businesses to be able to generate either new customers or enhanced capabilities. So there is no large, existing acquisition strategy at this point in there. We continue to look at opportunities all the time. And it is also a terrific way to gain competitive knowledge in the marketplace as well. But we are very, very pleased with the acquisitions that we have completed in 2004 and 2005.

In particular, when we talked about The Grow Network. The The Grow Network I think was a huge plus for us in terms of the Florida testing contract. It is such a terrific capability, and it is having such an impact . We expect that to continue, but it is really going to give us the strength that we needed to be the leader in assessment and reporting in the educational market. And with the mandatory testing guidelines, that's going to be very important.

Something like Capital IQ we mentioned. The integration effort has gone very very well. It is going to allow us there to create a platform by which we are going to be able to link other content businesses such as Compustat and that effort is well underway and it's going to give us a more robust capability to market to existing customers and to customize on that one.

J.D. Power gives us a platform that we're going to be able to extend a lot of their nonautomotive businesses more rapidly. About 65% of their business is still automotive, about 35% is not automotive, and we will take that number up significantly. We will also be able to expand their global presence. Most notably in Asia Pacific, where about two-thirds of their 22% nonU.S. revenues come from. And as we focus increasingly more and more on the Asia Pacific region, this is going to be an area in terms of customer survey capabilities that is going to give us a competitive advantage as well.

So these are all either component or platforms that link component type of acquisitions. We are very excited about that part, and we're going to drive very hard for 2005, which, given the start, is going to be a very good year for us. We are also going to be focusing on a very, very strong 2006 as well. So we are very pleased with where we are right now.

Thank you. This question comes from Fred Searby he is from JP Morgan.

Okay. Thank you. Great quarter, Terry.

Thank you.

A couple questions. One, can you give us an update on Basel 2 and issuance, trends in April. What you saw. We obviously saw very strong on the asset-backed side and residential mortgage side in the first quarter. Did that continue for you into April. And if you could also give us Some sense following up just on share. Are there any share shifts, is Fitch, mean Fitch seems to be having some success and there's some apparently asset-backed transactions where there is one rating agency being used in Europe. If you could just give us an update on your thoughts there. Thank you.

Thanks. On the latter part, we are not losing any share. Europe, as you well know, is very, very strong on the structured side. And so there's obviously a lot of appetite. I won't speak for any the competitors but I do think that you are correct that Fitch has the capability there and has a presence in the structured side of that market, but we are not losing any share. In fact when all is said and done, I think we will probably complete this year in an even more advantageous position. And as you say the implementations of Basel 2 had an effect in the first quarter and will continue to have a very positive effect in the rollout in the second quarter as well, and throughout the year. It is a very -- it is a very healthy market in Europe, and I might add one other thing. I am very impressed on the regulatory front with the leadership positions that IOSCO and CESR have taken in terms of working with the industry and formulating their opinions that in large part we have adopted as part of our code of conduct and have been very constructive in working with the SEC as well.

And just April, if you have any -- any thoughts on -- on trends in April. What -- if we saw any changes or should we continue to expect first-quarter trends on issuance.

Yes, no deviation in terms of our current thinking on April. April, in fact, is behind us, and it is actually a very, very good month for us there.

Okay. Thank you. Good work.

Thanks.

This question comes from Peter Appert he's from Goldman Sachs. You may ask your question.

Terry, not to read too much into your comments, but you suggested that the focus was to maintain operating margins of S&P in '05. Given the strong start, would that imply that your expectation is that margins will be down in the second half of the year on a year-to-year basis?

I am sorry, Peter, I didn't get that, is my expectations that what was going to be off?

The operating margins at S&P would be down in the second half of the year?

For the Corporation?

No, no for S&Ps. For the Financial Services segment specifically.

No, it's -- it is -- you know, it is too early to go there. Our guidance at this point, Peter, on S&P is that even with all the other things that have taken into account the dilution of Capital IQ and the pension plan assumptions effect that they take on as well, we still are expecting margins on the full year to be around where they were last year. On that par. And we will see as we go. The early strength that we continue to see on the mortgage-backed market, currently the surprise factor has been on the residential side, but we are also -- we are very pleased to see where we thought commercial mortgage-backed activity would pick up. So both of those have been quite strong and it has been across the board. So for margin levels at this point, we'll see say around where we were last year, but, no, we are not expecting any decline at this point in the second half.

Terry, can I ask you an unrelated question. You highlighted the success in social studies at the secondary level. How are you feeling about your social studies performance at the elementary school level?

Well, we'll see. Again, it is obviously a little too early on some of this, but one of the things that has me most pleased with the first-quarter results, as strong as the financial performance was at Standard & Poor's, was the signals that we are getting with the receptivity of the products on the education side. And that -- that is very good. This is going to be a good year for education, and thus some of the investments that we are making now as we continued from last year. We are not going to leave anything behind on this competition, and we are looking forward to some very good results here. So it is a little early to tell on that one, but we should have some indication as we -- as we get into next month and especially towards the latter end of that month, and we will be sharing that with you, but at this point, we are getting some very positive signs.

Great, thanks, Terry.

Thanks, Peter

This question comes from Douglas Arthur from Morgan Stanley. You may ask your question.

Yes, once again, Peter stole my thunder a little bit, but moving on. Capital IQ is getting a lot of buzz in the marketplace, and I guess my question sort of wide open is how real is the buzz? And does your investment in Capital IQ, mark a shift towards McGraw-Hill getting more involved in distribution platforms as opposed to just pure content and is that something you feel you will invest a lot more in going forward?

Thanks, Doug. Can you give me some clarity of what buzz you are hearing on Capital IQ?

Well, it is a very -- the financial information platform business is very competitive, and Capital IQ seems to be make a lot of inroads into the hedge fund community and competing very nicely against Thompson One and FactSet. I guess I am just trying to get your sense for how -- where do you see this thing going? What are your plans? How is it benefiting from the Compustat connection and how are you able to leverage Capital IQ that they weren't able to do on their own.

Thanks. Well, Doug, first off, we're the -- we're the new guy, we're the upstart a little bit. So we're -- our outward posture is to be very humble. We have great respect for our competitors and all of that. But things are going very well, and they are going well for good reasons. The folks at Capital IQ focus on customizing their capabilities for a variety of different customer sets. And it gives them not only a cost advantage but it gives them the specificity of the content they are looking for. And so I think because of their responsiveness, we are doing very, very well, and the hedge fund industry is one specific area that we have made terrific inroads on. But we have a long ways to go here, and we are very excited about what this platform does for Standard & Poor's, and we plan to continue to build on it.

We have not talked about equity research. We have not talked about some of the indexes and some of the related activity that way, but you can be assured of the fact that we are going to be looking to encapsulate those capabilities into this platform at some point as well and continue to build on its robustness. But we are off to a good start. The integration effort has gone well with Compustat, especially on the sales and marketing initiative, and so we're pleased -- we are ahead of expectations right now. Again, you've got -- it's early on, and so we are keeping a sense of proportion here, but we are -- we're pleased that we are making inroads on that part.

As far as the distribution strategy, I wouldn't say that there is an overt direction to become a distribution entity. What we need to be able to do is to be able to protect our content and to be able to be responsive to customer sets as to be able to create platforms by which you can have broader capabilities. Customization becomes one of the key issues, and one the nice things about Capital IQ, for example, is their technology base and their tool sets that allow for that kind of flexibility. So where we can create a platform that does connect various content, that is going to be very important to us, because stand-alone doesn't work in the long run on that part. And so from that standpoint, distribution is going to become important.

Meanwhile, just as a follow-on, you did renew your agreement with FactSet for S&P. So I assume that relationship remains strong?

Correct.

Okay. Thanks.

Thanks, Doug.

[OPERATOR INSTRUCTIONS] This question comes from Michael Meltz from Bear Stearns. You may ask your question.

Hi. A couple of questions for you. What was -- or can you isolate the organic revenue growth in the quarter at financial services and education? And separately, can you tell us somewhat specific expectations you have for J.D. Power for full-year '05? Thank you.

Okay, Michael. Let me get that -- organic growth at both the education segment and financial segment is obviously the lion's share of our growth and always will be. In terms of the development of all the kinds of programs, whether they be at the elementary, secondary, testing or in the higher education, it is a whole process of creating those capabilities. Acquisitions will come from time to time that will allow us to accelerate a component and the The Grow Network is a good example of being able to give us a holistic approach and the assessment and reporting capability and to be able to offer a much, much more comprehensive offering to a customer. And so that's where you will see those. But the majority of the growth in both of those segments comes from the talent, the creativity, the innovation of the folks that we have in terms of developing product for those markets. So I don't have an exact percentage for you, but it's the overwhelming majority in both cases.

And J.D. Power?

Oh, and J.D. Power. We don't break the specifics in terms of financials on that Michael. Our expectations for J.D. Power are to push aggressively on the nonautomotive with existing operations within McGraw-Hill, Standard & Poor's, BusinessWeek, construction, aviation, et cetera. As well as what we were talking about on the International side. I just returned from a trip largely in India but throughout other parts of Asia and I was very, very pleased to see just how strong the J.D. Power brand is. As those markets increase and become more consumer driven you're going to see a lot more opportunities and applications for the customer survey kind of rankings and ratings that way. So ours is to be aggressive on the development of nonautomotive and International.

Could you possibly just tell us then for full-year '04 what the revenues and EBIT were for J.D. Power?

No, we don't break that out, Michael, on that one, but I think that in terms of the competitive nature of the acquisition, there was information out there on that one. But for competitive purposes and the like, we are not going to break that out.

Thank you.

Thanks, Michael

We will take our final question. It's from Brandon Dobell from CFSB. You may ask your question.

Hi, thanks. I just want to focus on the education space for a quick second. Maybe, Terry, if you can give us an idea of as you look at the adoption opportunities this year on a percentage basis, how much do you think you guys are going to compete for? There are certain areas where you'd think that it it's just not worth going after from a return perspective and putting your sales force to work. And then secondly, In the testing arena, You mentioned kind of expanding the two scoring or preparation centers, one on East Coast, one West Coast. Does this mark a big departure in strategy or just an extension of what you guys have been doing before? Just trying to get a better feel on how top-to-bottom integrated you think you can be on the testing, preparation, scoring, distribution side versus previously as that business grows. Thanks.

Thank you, Brandon. Brandon, on the last one first. The whole assessment and reporting marketplace is a very fast-growing marketplace for a lot of reasons, both on the summative side, the high-stakes side where we are going to have to continue to build capability to be able to be responsive to each state now. But also on the formative side, which is going to be the higher growth components from the standpoint of being able to work in schools, within districts, and so forth. And, therefore the capability of having an East Coast, West Coast operation just gives us a little bit more flexibility. I don't leave out the possibility that we may be able to -- or need to expand even further, but if so, it will be because of the revenue projections of being so strong.

The educational assessment reporting marketplace is going to show significant results over the next several years, and especially as some of the No Child Left Behind mandatory requirements take place on that one and we certainly want to be ahead of that curve. On the adoption opportunities, no, as far as the 900 million or thereabouts opportunities that we've estimated there, we are looking to compete very aggressively. There are some areas that -- that may not make sense, but for the most part, it was going to be more of a decision of we go with a state specific requirement versus a national capability. And we will make decisions as we go on that one. For the most part, we are seeing some very good signals . It is all -- again, it is early in the year. I don't want to get ahead of ourselves and all of that, but I'm seeing some very good signals about the progress that we are making and I am very pleased with that. But we've got a lot of the year to go. And what we are looking for is the third quarter which seasonally, obviously is an education quarter and what we are going to be able to do there. I would also add, Brandon, the open territories. We are seeing some, again, strength in the open territories and after an 8% year-over-year gain last year, I definitely think that we're going to be in that range again this year and it might even be better.

Great, thanks a lot.

Thanks, Brandon.

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.