標普全球 (SPGI) 2005 Q2 法說會逐字稿

Good morning and welcome to the McGraw-Hill Companies second quarter 2005 earnings call. [OPERATOR INSTRUCTIONS] 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 presenters' slide available on the Internet. To view that, go to http://www.mymeetings.com/mc/join. I will repeat the URL once more for those who would like to view the presenters' slides online, http://www.mymeetings.com/mc/join. You will be prompted to enter your name. The net conference meeting number is PG9610510. The password is McGraw-Hill. All caps with the space between McGraw and Hill and the event type is conference.

This call is also being simultaneously Webcast from McGraw-Hill's Investor Relations Website and will be available for replay about two hours after this meeting ends, both by phone and on the Web for seven days. [OPERATOR INSTRUCTIONS] I will now turn the conference over to Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. Sir, you may begin.

Thank you. And good morning to everyone here and abroad for joining us at the McGraw-Hill headquarters building on the phone and on the Web for the McGraw-Hill Companies second quarter 2005 earnings call. I'm Donald Rubin, Senior Vice President for Investor Relations of the McGraw-Hill Companies. With me here today are Harold McGraw III, Chairman, President and CEO and Robert Bahash, Executive Vice President and Chief Financial Officer of the Corporation. This morning, we issued a news release with our second quarter results. We trust you have all had a chance to review that release. If you need a copy of it and financial schedules, they can be downloaded at www.mcgraw-hill.com/investor _relations. Once, again, that's www.mcgraw-hill.com/investor _relations.

Before we begin, I'd need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in this teleconference may include 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 expects and current economic conditions that 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 10K's, 10Q's 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 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 and President and CEO of the McGraw-Hill Companies, Terry McGraw.

Okay. Thank you very much and good morning everyone. I'm Terry McGraw Chairman and CEO of McGraw Hill Companies and we're glad to have you with us today. And if you're listening in through the teleconference or the Webcasting, we appreciate your attendance and support and your interest in the McGraw-Hill Companies. As Don said, Bob Bahash, our Executive Vice President and Chief Financial Officer is with me. And after I go through the second quarter operations, he will give you a little bit more on the results and the overall financial condition of the Company. And obviously after that, we will go in any direction that you would like with any questions or comments or otherwise.

Let me very quickly begin by reviewing the highlights of a very solid second quarter. Diluted earnings per share from continuing operations increased 18.6% to $0.51. Net income was up 17.7% and revenue grew by 16.9%. Our results also reflect $0.035 of dilution in the second quarter for acquisitions in 2004 and 2005 and an adjustment in our pension plan assumptions for this year. We are learning the very good year that we expected and talked about earlier on this year is taking shape.

A question mark at this time concerns funding of textbooks in Texas. I fully expect Texas will come through but I will review that situation for you in a little bit more detail if just a few moments. Given the strength of our first half performance and the outlook for the second half, we are taking this opportunity to increase our earnings guidance for the year. We now expect double-digit growth in earnings per share from continuing operations. And that will include $0.08 to $0.09 of dilution from acquisitions in 2004 and '5, changes in the pension plan assumptions for 2005, but it excludes a 2004 noncash benefit of $0.05 per share from accrued tax liabilities.

We continue to be encouraged by the economic conditions. Standard and Poors Chief Economist, David Wyss, expects the gross domestic product to grow by 3.7% in the United States this year. Inflation is under control, around 2%. Corporate cash balances are at record highs after posting double-digit increases for 12 consecutive quarters. S&P expects capital spending for equipment to increase by 11% this year. The Federal Reserve continues its measured approach to interest rate increases without slowing down the economy. We expect rate increases at both the August 9 and the September 20 meetings with Fed funds rate reaching 4% by year-end. No change from what we anticipated coming into this year. The state revenue picture improved dramatically in the last fiscal year. And that situation is expected to continue in the new fiscal year, which starts July 1 for 46 states. That assessment comes from the National Association of State Budget Offices.

On that positive note, let's review our operating by segment and let's begin with McGraw-Hill Education, which had a very strong second quarter. And we are very pleased at the position we have as we proceed into the third quarter. Let's start, again, with McGraw-Hill education for the second quarter. Revenue increased 14.8%. Operating profit grew by 25.5%. The operating margin expanded to 11.4. For the first half, revenue increased by 12.2. The operating loss was cut by 39.7% and the operating margin also improved. We are off to a very good start at all levels of the education market. Based on a good start to the year, we now expect to outperform the elementary-high school market with or without all of the Texas funding. If all the Texas funding obviously comes through, the market could grow by 10% or more. We expect to outperform the U.S. college and university market, which could grow by 3% to 4% this year.

McGraw-Hill School Education Group, our elementary/high school business, increased revenue by 17% in the second quarter and is ahead for the first half by 15.8%.

Also, the McGraw-Hill Higher Education professional and international group grew its revenue by 10.9% in the second quarter and is ahead by 7.3% for the first half. In the El-High market, we're seeing excellent results in the new state adoption market, the open territories and in testing. A good year gets even better if Texas comes through, as expected with funding for health, world languages, music and fine arts.

Now, given that there's been a number of questions about Texas, I'd like to review the outlook for funding school materials in Texas and let you know what we know. Today, we believe that we are closer than ever to a successful resolution of the funding issue and certainly closer than we were on May 30. That's when the Texas Legislature completed its regular session without providing funds for the instruction materials the State had already adopted for purchasing for this year. I want to make it clear that the new books were not a key issue for the Texas Legislature. They were caught in a crossfire when the lawmakers in Texas could not agree on how to raise taxes to pay for the State education system, as well as other things, and set the formulas for allocating revenues.

The failure to act provoked outrage around the State and so pressure has been building for the resolution of all educational funding issues. Governor Perry took the first step by vetoing the $35 billion State school funding budget and calling the Legislature back for a special 30-day session. That session ended last Wednesday without a decision on the key taxation and revenue sharing issues. So, the Governor immediately called another special session. As we speak this morning, Texas Legislatures will be starting the sixth day of their second special session. And the good news is that there has been a lot of progress being made. Although funding of the new books for the upcoming year is still contingent on passage of the bills on taxes and allocation formulas, 295 million for the instructional materials called for under Proclamation 2002 was for the first time included in the general school funding bill. These are where the health, music, art and the world language materials that were adopted by the local districts earlier this year, that's where that is contained.

Both Houses have passed that measure at the end of the first special session. The previous general funding bill had only included funds for the ongoing contracts, plus the business and vocational books adopted last year and that was under Proclamation 2001. Now, all the funds for instructional materials that educators had been seeking were included in one bill that both Houses have approved. Our best intelligence from Texas suggests that the Legislature is closer than ever in resolving the school finance issues. That resolution may come by the end of this week, since there is little appetite, I'd have to believe, for spending the rest of August in Austin. What is less certain at the moment, is the fate of some of the issues legislators are evaluating. These include things like proposals to change the adoption process in Texas and transition to an allotment system for funding instructional materials and technology. But regardless of how the Legislature finally decides these issues, Texas will remain a big and viable market, 4.3 million students with growing enrollment.

Now, there is even another issue that we need to discuss. And that is the delivery of books to Texas schools, which start - - these schools start the new semester between August 8 and August 17. Now, in Texas, publishers don't ship books to schools on their own trucks. Instead, the Texas Education Authority establishes a schedule for sending trucks to the publisher's warehouse and delivering the materials to their schools. Currently, there is no schedule for shipping the new books without funding the TEA, the Texas Education Authority, stopped accepting orders from schools. Once the funding has passed, the TEA will open up its ordering system again and then create shipping schedules. Texas schools are using 12 to 18 year old books in the disciplines that are about to be funded. Enrollments are growing, so there's every reason to be believe that they are facing a shortage in some of those titles. Under those circumstances, we will help the State avoid any delays in getting the new books to the schools on time. And that will include expediting deliveries by shipping materials on our own trucks.

We have been tracking potential new business, so, here's the bottom line. We still expect Texas to fund all of the instructional materials that the State has adopted. If and when funding comes through, we expect to do very well, making a very good year in the El-High business an even better one. And we don't expect to forego any business in Texas for inventory reasons. In the second quarter, Texas started ordering vocational and technology titles that had been scheduled for sale last year. That's a $140 million adoption that had been postponed due to the lack of funding. Now, those funds are available and we expect to capture a significant share in the business education, technology education and the family and consumer science areas.

The solid start to the year, again underscores our strategy of providing a broad spectrum of products to a market with diverse needs. Our performance was strong and was very balanced. We are seeing excellent capture rates in social studies, which is the biggest single opportunity on this year's new state adoption calendar. We expect to be the leader in the secondary market in social studies. We are also doing very well in science and in health. Our alternative bases in reading and math are selling extremely well. This is all part of the McGraw Hill learning group and I'm referring to Open Court Reading and Everyday Mathematics.

We realized incremental revenue in the second quarter from Reading First, one of the key No Child Left Behind Legislation programs. And because of the No Child Left Behind Act and the new emphasis on accountability and adequate yearly progress, there is a greater focus on bringing underachieving students up to speed. As a result, there is new demand for intervention and remedial products that meet the needs of children who are falling behind. In response we recently introduced Kaleidoscope, a reading intervention product for grades two through six. It's being well received in the marketplace. And Los Angeles Unified School District recently purchased Kaleidoscope to reinforce its own efforts to improve student reading capabilities.

No Child Left Behind is also having an impact on the testing market. We've seen solid growth in our custom contract businesses as states prepare for mandatory testing in reading and mathematics at the end of the 2005/2006 academic year. We're also winning new business in testing. In California, we recently were awarded a five-year contract for the California English Language Development Test. This is a statewide assessment of English language learners in grades K through 12.

In Nevada and Connecticut, we're on a - - we're on board for a statewide use of a new product that we will officially launch early in August. A challenge for educators today is to assess the language needs of a growing population of English language learners. To meet that need, we introduced LAS Links. We believe it is the most comprehensive research-based English language proficiency assessment product on the market. It's aligned to state standards. It measures listening, speaking, reading and writing. It also helps states meet the new requirements established under the No Child Left Behind Act for improving the proficiency of English language learners.

In Oklahoma, we've just been awarded a five-year extension for the end of instruction courses. Oklahoma requires middle and high school students to take end of instruction tests in algebra, biology, U.S. history and in English. As part of this agreement we will be phasing in the online administration of tests. And you're going to see more online testing as we migrate from paper and pencil to electronic format. Technology will transform the testing business, providing quicker turnaround of results for students and educators. With faster access to assessments, teachers will also be in a better position to individualize instruction and to improve student achievement, which, obviously, is what it's all about.

New growth opportunities are continuing to merge for The Grow Network business that we acquired last year. The individualized study guides, Grow Network creates, and delivered to the Texas 11th graders, has led to new business. As you may recall, about 50,000 Texas students did not get a passing grade in the 11th grade exit exam last year. Students had another opportunity to take that test and another opportunity to pass that. Before doing so, all 50,000 students received customized study guides from Grow Network to help them focus on the subjects they needed to study in order to pass the test. The study guides helped improve student performance on the test and that's according to Dr. Shirley Neely, the Texas State Education Commissioner.

As a result, Texas will begin using the study guides with students in the 9th and in the 10th grades. And now Arizona will use Grow Network's personalized study guides for the high school juniors and seniors who did not meet state standards on their test this spring and who do not meet the state standards this fall. As of last year, 20 states, had exit exams to determine high school graduation. That list will grow. So, you can begin to see the potential for a product like customized study guides that help improve student performance.

In Higher Education, our titles are performing very well here and abroad. In the U.S. college and university market, we're encouraged by the performance of all three major imprints. This is an important year in our science, engineering and math group, which is publishing new editions of some of the best sellers in chemistry, biology and mathematics. These titles include Silberberg's Chemistry, the Fourth Edition. Chang's Eighth Edition of Chemistry. Mader's Inquiry in Life, 11th Edition. And Dugopolski's Intermediate Algebra, the 5th Edition. We're also seeing increased sales in the humanity, social science and language group as well as the business and economic imprints, as well.

Sales are also up solidly for our post-secondary - - our for-profit post-secondary schools. In professional markets, Harrison's Principles of Internal Medicine and Manual of Medicine are selling well. The Spanish language version of Harrison's Principles of Internal Medicine sold very well in Mexico during the second quarter.

So, summing up overall for the McGraw-Hill Education group, we're off to a very good year. And it's shaping up a little better than we had expected and we're very pleased. We expect to outperform the El-High market and we expect to outperform the U.S. college and university market.

Okay, let me now turn over to the financial services segment. We had an outstanding performance at Standard and Poors. In the second quarter, revenue increased 18.4%. Operating profit grew by 20.6% and the operating margin increased to 43.2%. For the first half, revenue is up 19.1, operating profit grew 23.9 and the operating margin increased to 42%. We have consistently predicted double-digit top and bottom line performance in growth in 2005 for this segment and clearly we're on track to achieve our forecast.

Unexpected strength, particularly in the U.S. residential mortgage-backed securities market, made the improvement that we had anticipated even better for the second quarter. As you may recall, I hope you don't, but as you may recall, we had expected dollar volume issuance in the market to decline by as much as 20% this year. U.S. residential mortgage-backed securities dollar volume issuance grew by 40% in the second quarter and was up 51% for the first half. So we're going to stop forecasting for the residential mortgage-backed market because it's just continuing to go up. Comparisons are going to be more challenging in the second half or should be. Residential mortgage-backed security dollar volume issuance was up 59% in the second half of last year, which also set unbelievable new records. But in view of the first half strength this year, we no longer expect a decline in dollar volume issuance in the U.S. morning-backed securities for the year 2005.

Now, we also forecasted that the U.S. mortgage-backed securities market would also do very well this year. And here we're on target. Because it had benefited from a real nice surge in the commercial mortgage-backed securities area. U.S. dollar volume issuance for the commercial mortgage-backed securities set a new record. It was up 76% in the second quarter and is up for the first half by 70%.

That's not the whole story. There were other important contributors to Standard and Poors' second quarter performance. Our international ratings grew faster than S&P's domestic ratings in the second quarter, again, and accounted for a little over 35% of ratings revenue, up from about 33% for the same period last year. Growth overseas was broad-based, international ratings grew in all four economic regions; Europe, Asia-Pacific, Canada and Latin America. In Europe, ratings revenue has been increasingly delinked from changes in both the region's growth, GDP, as well as bond volume issuance. We are adding new issuers and improving our market penetration that disintermediation, the movement way from banks, continues in Europe. Where even far more corporate debt remains on banks' balance sheets than in the United States.

Increasingly, European asset managers are using securitization techniques, notably collaterized debt obligations to portfolio increase returns. Securitization continues to be the vehicle of choice for banks. These are important reasons why structured finance was so strong in the first half and Europe, as well, on top of tremendous strength last year, as well.

Throughout the Asia-Pacific region, structured finance is considered one of the most efficient financing tools and forms of investment. In addition, to growth in structure finance, we also saw record bond issuance among emerging Asian corporations, seeking fresh capital to finance expansion. In Canada, growth was broad-based. In Latin America, structured finance and corporate finance provided most of the growth in the second quarter. Credit markets continue to recover in Argentina, which is encouraging. We've seen some real strength in the Brazilian domestic market. But the primary driver was Mexico, where structured finance and financial institutions produced a high level of activity.

All of this activity underscores the market's embrace of securitization and the continued strength of structured finance around the world whether it be asset-backed, mortgage-backed, commercial, residential and si forth. It also is another demonstration of why S&P continues growing, even though the issuance of corporates in the U.S. bond markets actually trails last year. In the second quarter, total U.S. new issuance dollar volume increased by 23%. Corporate issuance was down 2%. And public finance grew by only plus 3%. Mortgage-backed securities were up 44.2% and asset-backed securities were up 29.1%.

Just to giving you the same numbers for the first half, for the first half, total U.S. dollar volume was up 21%. Corporates were off 11.5%. Public finance was up 8.4. Mortgage-backed securities were up 53.4% and asset-backed securities grew by 18.9.

We continue to benefit from ratings and services that are not tied to new issuance. These are the nontraditional rating activity. They accounted for more than 19% of ratings revenue in the second quarter. Financial strength ratings of insurance companies counter-party credit ratings and performance evaluation services offset a slowdown in both bank loan ratings and rating evaluation services. We're benefiting from growth in surveillance fees and the annual fee arrangements. Again, that reduces any potential volatility.

And there was strength elsewhere at Standard and Poors. Exchange traded funds, based on S&P indexes, continue to attract assets. We saw 31.2% increase in assets under management in these exchange-traded funds, in the second quarter versus the same period last year. Reaching $118.2 billion at the end of June. Our indexes also produce revenue when contracts for exchange-traded funds are traded. On the Chicago Mercantile exchange, the Chicago Board of Option Exchange, other option exchanges. Spider options started trading on January 10, on six option exchanges. They're off to a good start. In the second quarter, the daily average volume for spider options was 164,750. At the same time, average daily volume for the S&P 500 options contract is also growing. The average daily volume in the second quarter was 260,139, a 38.4% increase over last year.

We are still building in this market and will continue to do so for some time. In the second quarter, S&P delivered three new indices with the potential to attract more assets. The S&P Toronto Stock Exchange Canadian Bond Index, the S&P [Sidic] China 30 Index, which includes 30 stocks that foreign investors can buy on the Hong Kong, New York and Singapore exchanges and the S&P Completion Index, which tracks about 4,500 U.S. equities outside of the S&P 500. Vanguard has already announced that it is going to create a new exchanged trade fund based on our Completion Index.

We will continue to create new indexes and develop new custom indexes. Two of the new biggest customers are UBS for a Domestic Australian Infrastructure and Utilities Index and J.P. Morgan for an S&P All Stars Index. We're also continuing to benefit from the sale of equity research to global research settlement firms and to nonsettlement firms. Coverage has increased at settlement firm, adding to the incremental revenues that we're generating this year. As this chart shows, five star stock selections by S&P analysts have outperformed the S&P 500 for years. That fine record continues in 2005. For the first half, the S&P five-star selections grew by 5.9% while the S&P 500 overall was down 1.7.

Our acquisitions and financial services are on track. In early June, we increased our ownership in CRISIL, Credit Rating Information Services India Limited. And that is India's leading credit rating agency. We now own 60% of CRISIL 58.5, up from more than 10% before the tender offer.

In April we acquired Vista Research, which provides investors access to a network of professionals for primary research. In February, we added ASSIRT, a leading provider of fund data, ratings and portfolio services in Australia. And last year, we acquired Capital IQ. We are moving ahead with the integration plans in all of these. We're already made excellent progress at Capital IQ, integration of back office functions and day-to-day operations are complete. We now have one sales force supporting both Capital IQ and S&P Compustat. The strong growth that has also contributed to the margin improvement that we've seen in the first half, S&P faces some tough comparisons in the second half, but we still expect the operating margin to end the year at least in the same neighborhood as last year.

Earlier, I pointed out that the U.S. residential mortgage-backed security issuance grew strongly in the second half of last year. So, the comparisons shouldn't get any easier, but our pipeline looks so good, so strong as we enter the third quarter. In fact, the pipeline looks also very good for the commercial mortgage-backed securities market as well as collateralized debt obligations, which increasingly we're going to see more growth.

We expect continued strength overseas, anchored by the structured finance market. Public finance could soften in the second half as interest rates rise a little bit. And any rebound in the corporate market still seems uncertain. Obviously, it depends on the growth of the U.S. economy. But also for the need for capital as many, many companies still have very, very strong cash balances that they're carrying.

Finally, I'd comment on the current regulatory outlook that - - now that a bill that was introduced and aimed at rating agencies was introduced in the House of Representatives. In testimony on June 29, before the House subcommittee on capital markets, issuance and government-sponsored enterprises, S&P pointed out that the new bill raised serious constitutional issues. It had a disregard for the important concept of market acceptance of rating agencies and ratings. And could have a disruptive effect on the efficient operation of capital markets.

We remain committed to constructive change that would eliminate barriers to competition in the credit ratings industry. We continue to believe that legislation is not the answer. S&P will keep working with the Securities and Exchange Commission on an oversight framework that would provide perspective oversight over NRSRO's, nationally recognized statistical rating organizations. And would also closely track IOSCO's code of fundamentals, that's the International Organization of Security Commissioners. And S&P's own code of conduct, which, while preserving the constitutionally-protected independents of NRSRO's.

Yes, the SEC has proposed a rule to formally define the NRSRO term and designation process. One of the goals of that effort is to increase competition. Before that, we continue to believe that these initiatives should be allowed to move forward. We are not going to predict, obviously, Congressional activity, our action by the SEC, our best estimate now is that there will be no final resolution on the regulatory front until September, probably at the earliest. Or even towards the end of the year or into next year. By that time, we may have heard from the House Subcommittee or the SEC on the framework aspect.

In the meantime, S&P has filed a detailed Constitutional analysis of that new bill, that's HR2990 to help the House Subcommittee better understand why the bill is gravely flawed. All of this activity has not changed our assessment of the situation. We continue to believe there will be no adverse or no impairment of the basic business model.

So, summing up the outlook for financial services, on track for double-digit top and bottom line growth in 2005. Structured finance will continue to grow globally. Acquisitions are on track, integration is complete or well towards getting completed. And the operating margin will end the year at least in the same neighborhood as last year.

With that, let me go over to the information Media Services area, in the second quarter here, revenue grew by 18.6%. Operating profit fell by 45.2% and the operating margin declined to 5.9. For the first half, revenue grew by 9.1%. The operating profit declined by 52.3 and the operating margin was 4.5. A major factor in these results is the acquisition of JD Power and Associates, which contributed 33.6 million to our top line increase of 36.2 million. The decline in operating profit is primarily due to the acquisition related costs and the softness in advertising.

JD Power and Associate; off to a very good start and exceeding our expectations. The integration is also proceeding very smoothly. JD Power and Associates is primarily responsible for the revenue increase in our business to business group, which was up 21.8% to 202.4 million in the second quarter. JD Power produced solid growth in both the auto and importantly in the nonauto business areas with the nonauto portion growing faster.

New syndicated studies in the telecom industry and expansion in the insurance sector were key contributors to this performance. Syndicated research is JD Power and Associates core product. It's self-funded, obviously to maintain the credibility and objectivity of the results. A measure of the worth at JD Power and Associates syndicated research is the value clients put on the results. Based on the firm's syndicated studies, awards of excellence are given each year to companies who excel in quality and customer satisfaction. The top-rated companies are eager to inform the public about these awards, so they enter into licensing agreements with us to advertise them. In the second quarter alone, they paid for 4.8 billion print impressions citing the JD Power and Associates awards in the nation's newspapers and magazines. Those ads were placed by home builders, satellite TV providers, foreign and domestic automobile companies. All of that advertising, of course, is an important reason why brand recognition for JD Power and Associates is so high with U.S. consumers. The pipeline of business at JD Power and Associates is growing and we're looking forward to the second half.

Advertising pages declined in the second quarter at Business Week. Ad pages in the North American edition were down 9.2% in the second quarter after an 11.5% decline in the first quarter. That leaves Business Week off about 150 pages or about 10.1% for the first half and that's all according to PIB, the Publisher's Information Bureau. In July, through the issue of July 25, Business Week is off 8.4%. As these figures indicate, we are reducing the rate of decline but clearly a recovery in advertising is still to be realized. Business Week has seen signs of increased activity in all of its regions and that could translate into a pick-up in advertising starting off Labor Day and we're hopeful that that takes place.

Some of our business and professional publications like Architectural Record, the E&R, the Regional Construction Publication, they experienced a pick-up in advertising in the second quarter. Our new magazines, Constructor and My House, produced incremental revenue in the second quarter, as well. In the second quarter of 2005, we continue to make investments in the McGraw-Hill construction network, to strengthen its effectiveness and efficiency. In aviation, we benefited from the bi-annual the Paris Airshow, where competition between Boeing and Airbus helped spark an increase in attendance. We also experienced growth in the energy market, where new pricing levels and volatility is creating demand for our information.

Revenue at broadcasting was essentially flat at 27.9 million. Local time sales were quite strong, helping to offset the loss of political advertising in a non-election year, softness in our National Times sales and a slight reduction in our network compensation. In the second quarter, we completed a new fiver year network compensation agreement for all of our stations with ABC. Although compensation is being reduced, we believe we have reached a very reasonable accommodation with the network on a variety of issues, including more time sales slots and so forth. Pacing for the third quarter is up 4% at this time.

Business Week announced a major reorganization last week that signals the next step in the evolution of the franchise. The organization changes come just about four months after Steve Adler has taken over at the new Editor-in-Chief and reflects his thinking on the exciting new directions for Business Week. The ambitious goal is to extend Business Week more effectively across a variety of business channels. To meet the changing needs of business professionals for news, analysis, insight, tools and so forth. Under Steve Adler's direction, Business Week will use whatever format and frequency what best serves its global audience.

As part of the restructuring, three Executive Editors positions have been created reporting now to Steve are an Executive Editor in charge of the Global Franchise. Heading that up will be Joyce Barnathan, who will oversee the extension of Business Week's reach. An Executive Editor For the Magazine, John Byrne, who rejoins us after more than two years as Editor-in-Chief of Fast Company Magazine. John previously spent 18 very productive years with us at Business Week. And the third, an Executive Editor Online will be headed much by Kathy Rebello, who will direct Business Week Online and spearhead its further integration with the magazine and our other channels.

As this organization suggests, Steve and his team will focus on three priorities, extending the reach, enhancing our flagship magazine and extending our online presence. Business Week has come a long way since publishing its very first issue in September of 1929. Today, it is the bestselling global business magazine with a readership worldwide of 5.6 million. For this new structure, Business Week has organized to build for their future.

And therefore summing up for information; in media services, our acquisition of JD Power and Associates is off to a very good start. Advertising still remains soft and there are some signs of improvement but we have to see those as we get into the late in the third quarter, fourth quarter. Sales of high value information products are growing. And finally, again, for the Corporation overall, a very good year is taking shape for the McGraw-Hill Companies and we're quite pleased. As a result, we're taking this opportunity to increase our earnings guidance, again, for the year. We now expect double-digit growth in earnings per share from continuing operations which include the $0.08 to $0.09 dilution from acquisitions in 2004 and '5, changes in the pension plan assumptions for '05 and excluding the 2004 noncash benefit of $0.05 per share. And that came from some accrued tax liabilities.

So, that concludes the comments on the corporation and three segments. Let me turn it over to Bob Bahash, our Chief Financial Officer, he will go through the financial condition and then we will go in any direction that you would like. Bob?

Thank you, Terry. I'll start this morning by reviewing our share buyback program. As you know, in January, the Board of Directors reaffirmed its commitment to an expanded share repurchase program. The goal again in 2005 is to buy back 6 to 10 million shares on a post-split basis. In the second quarter, we acquired 2 million shares at a cost of 87.4 million. And for the first half of the year, we have 9.2 million shares at a cost of 405 million. And are obviously very close to completing our stated goal of up to 10 million shares.

8.6 million shares now remain in the program that the Board established and authorized in January 2003. The diluted weighted average shares outstanding for the second quarter were 380 million shares. A 5.2 million share decrease compared to the second quarter of 2004. On a year to date - - our year to date acquisition investment total 450 million. That reflects the acquisitions of JD Power and Associates, Vista Research, ASSIRT and the controlling interest in CRISIL Limited, India's leading credit rating agency. We now own 58.5% of CRISIL, we had owned less than 10%.

As we have previously stated, we're anticipating dilution of $0.08 to $0.09 for 2005. And that will come from the impact of the 2004 and 2005 acquisitions of $0.06 to $0.07 and pension plan assumption changes of approximately $0.02. And, of course, dilution does not fall evenly in each quarter this year. The biggest impact was in the second quarter, where we had $0.035 cents dilution, $0.03 came from the acquisitions and $0.005 from the pension plan assumption changes. The dilution from acquisitions is mainly due to the seasonality of JD Power's business as well as acquisition costs. For the first half, we had $0.05 dilution. $0.04 came from acquisitions and $0.01 from the pension plan's assumption changes. Of course then for the second half of the year, dilution will be - - will have much less of an impact, about $0.03. By 2006, the acquisitions made in 2004 and 2005 will be cash positive. They'll dilute 2006 earnings per share by about $0.01 to $0.02 and virtually all of that dilution will be from the amortization of intangibles.

As a result of recent acquisitions and accelerated share repurchases, we have returned to the commercial paper market and now have debt outstanding. However, we expect to return to a surplus cash position by year-end. As of June 30, our debt outstanding is 390 million. And this is offset by our international cash position of 246 million for a net debt position for the corporation of 144 million. Net interest expense was 3.5 million, a 1.4 million increase compared to last year. And it's mainly from the acquisitions and, of course, to a lesser extent the accelerated share repurchases. For the third quarter, new interest expense will increase modestly and then decline in the fourth quarter as we return to a surplus cash position by year-end. And then we expect for total interest expense for 2005 to be around $10 million, which compares to 6 million for 2004.

Let's now look at corporate expenses. Corporate expenses decreased in the second quarter by 4.9% to 29.5 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 expense as compared to 2004. Our effective tax rate for 2005 increased slightly from 37% in the first quarter of 2005 to 37.2% for the second quarter of 2005. The increase is mainly due to changes in foreign tax laws. For the remainder of 2005, we expect the rate to stay at approximately 37.2%. Of course, in the absence of intervening audit settlements or further federal, state or foreign law changes or changes in the locational mix of our income.

Let's now review capital expenditures, which include prepublication investments and purchases of property, plant and equipment. Our prepublication investments were 60.7 million for the second quarter of 2005, which is 8 million lower than 2004. The spending is on the development of new products is expected to accelerate and for 2005, prepub. investments is still projected at 270 million. The purchases of property, plant and equipment were 26 million for the second quarter of 2005, which is 5 million higher than compared to 2004. For the year, we expect spending levels to approximate 130 million.

Now let's look at some of the noncash items. Depreciation for the second quarter was 26 million, as compared to 23 million last year. For 2005, we expect 110 million, reflecting the higher level of capital expenditures that occurred in 2004 and 2005. Amortization of intangibles for the second quarter was 12 million, which is a 5 million increase from last year. And for the year, we expect about 49 million, which is largely driven by the recent acquisitions. Our amortization of prepublication costs for the second quarter was 55 million, which is a $17 million decrease compared to the second quarter of 2004. For 2005, we continue to expect about 250 million as the amortization will accelerate to match the major third quarter selling season. McGraw-Hill Companies education's global transformation platform has been operational for some time and is functioning effectively in all our North American operations as we enter this year's busy season. The total project cost still remains at 180 million. Thanks and now back to Terry.

Okay. There you have it. An awful lot of numbers throughout all of that. And I hope that we've got all of that in line for you. But it gives you the detail behind what has a very exciting start to the year. We're very pleased with where we are. And we now have good clarity on the rest of the year and that's why we've improved the guidance and we're pleased with that, as well. With that, back to you, Don and then we will go in any direction anybody would like.

Thank you. [OPERATOR INSTRUCTIONS] So, let's start now. Is there any questions in the room?

Good morning, Terry. Two questions. If depending on how Texas plays out, could there be a little bit of a bulge in the third quarter El-High sales? And secondly, margins are ahead pretty nicely in financial services for the first half and you're forecasting sort of a flat year. What conditions do you see that would result in the margin going down in the second half to end up flat for the year?

Okay. Thanks, Ed. First on the Texas one, yes, obviously,we had a very strong El0High second quarter and first half. There was a little bit of Texas monies in the second quarter. Most of it was in the third. And so we would see probably with complete funding, which I fully expect, I would expect a little bulge in the third on that side of it. On the financial services side, the margin, no, I wasn't signalling anything with that. It's just, it's very, very strong. We've said all year that we thought margins at financial services would be about where they were last year, which I think was 40.2, Bob, in - - and so we said it would be somewhere in that neighborhood.

Now, you had the dilutions from CRISIL, you've got that dilution from Capital IQ in there. You have some of the pension plan assumptions on that one. So, there was going to be some give and take to that. That's why we said at least in the neighborhood of where we were last year. We are running, obviously, ahead of that right now. In large part because of a little bit of unexpected strength, especially on the structured finance market. And your guess on residential mortgage-backed and the whole housing boom and all of that is probably the best. There is no let-up.

And even as we go into the third quarter now, the pipeline is very active and very full. So, we expect there will be no decline in that way. So, it will be somewhere in that neighborhood and dependant upon continued strength, we will go there. But there is no downturn on that part. In fact, I would give you a little more. When we talk about double-digit top to bottom line for the year, we will do top - - double-digit top and bottom line growth in the second half.

Terry, can you just look out to the '06 El-High adoption schedule and just highlight where the big dollars are? And if there's any particular state which accounts for the bulk of the monies as Texas does this year? And then just looking at the acquisitions, can you quantify - - you quantified the revenue impact from JD Power. Can you quantify the revenues from the other acquisitions in total in the quarter? Thanks.

Okay. Okay. Well, as you know and you've got the schedules and we have them over there for you, for both the elementary and the secondary school area. For next year, we are - - we will have continued residual sales in social studies, science, health, music and we're gearing up for reading. And we have a huge opportunity there and we're very excited. We said, and correct me now, Don, we haven't come up with any formal numbers now on this one. But probably somewhere around 800 million of new adoption money for next year. And it could be more than that. As we're seeing now with many states, there is acceleration of some funding in some areas and there's postponements a little bit in others. And so, it's getting a little harder to get the whole number. Remember, it's not just the new adoption monies from the 20 adoption states, it's the open territories as well, which are growing very, very nicely.

But then you also have the residual sales and that is a big number. That is is year 2, year 3 monies for those adoptions. So, we should be fairly active on that one. And I'm expecting at this point - - let me put it another way. There is nothing out there that I see at this point that would not suggest that we're going to have a very strong year on that part. But we will get toward that towards the end of the year when we start projecting some of those kind of numbers. As you noted, JD Power and Associates, a good deal of the revenue increase in that segment was due to the addition of JD Power. And the profit impact, again, was because of the acquisition cost, the dilution, of that as well as a - - still a continued very soft market in business advertising on that part. And I'm sorry, the other part was - - you wanted - -?

Can you quantify the revenue contribution from the other attributions in the quarter?

I don't think we've broken all of those out, have we?

No, we did not break those out because - - we broke out JD Power simply because of the significance of the JD Power on the overall segment. But the other acquisitions are relatively modest and we did not break those out.

I'd add one more comment on the El-High situation that we're seeing. Some people are taking a look at the current situation in Texas as a negative. And political squabbling and not knowing how to fund anything. This is a very positive situation. Again, all states, and especially as we see increasing worldwide competition for students and learning and all of those kind of components, everybody is trying to get down the education reform path as fast as they can.

And therefore it is going to have huge implications for funding, it is going to have huge implications for how how school administrations are going to deal with some of this. And therefore, with all of this, the dialogue part and the debate part is very healthy. And I think we're going to continue to see a lot more of this. And that's why the pie, I think, the funding pie, is going to get bigger. You're also going to see more emphasis placed along with materials with technology. And that's one of the issues that Texas is having. Is that there are some districts that are trying to go in certain directions, a little bit differently. And that's why they're sort of looking at the whole system now and saying, well, maybe we ought to rethink our allocating process and how people can utilize funds and the like.

So, from our standpoint, this is all a very healthy part of it. Texas is a huge education state, 4.3 million students, growing enrollment. And therefore, a lot of people, I think, are watching Texas. as to learn what telltales in terms of how to deal with some of these issues, but it's positive. It's going in the right direction. And I think our educational system in the United States is not what it needs to be. It needs to get stronger. We have to not only get better student achievement, which means higher graduation rates, lower dropout rates and all that. But we've also got to have better school performance. And so there's a lot of tension in the system and that's good. But it's because we need to really improve the quality of student capabilities.

Thank you. Our first question comes from Peter Appert with Goldman Sachs.

Terry a, couple of questions, please, on the education segment. I'm wondering is - - did any of the strength in the second quarter education sales and earnings relate to timing issues? In other words, did any of it, do you think, come out of the third quarter? And then secondly, longer term, with the completion of the global transformation project within the education unit, is it possible to quantify some of the economic benefits you're seeing there? And does it give you any greater confidence in debting to your 20% margin target near-term? Thanks.

Terrific. Let me take the last one first and I will start on that one and let Bob finish up with that. But that was $180 million project. We are very close to the completion on that. And we are trying to obviously fine-tune any assessment on what savings are going to be in the out years. We're still in the international implementation now. But I would - - I think it's fair to say that we got off to a rough start, with it, like any of these big EPR projects, they're costly, they're cumbersome. It requires a lot of cooperation. And I think that we're finishing up in really, really good shape with GTP. And due to some very, very good leadership on that side. So, we'll have to see. We are not departing from that 20% margin goal and then we can talk about going beyond. We have to make sure that, again, with some acquisitions and the like that we hit the 15% intermediate target on that one. But then we should be in a position where we will be adding on to that. Bob, do you want to add anything more to the GTP?

Yes, Peter, there's really a couple of phases to the global transformation project. And the first phase was the order to cash side of it. And that was the creation of one global platform to replace multiple platforms on the funding of the order to cash side. We wanted to make certain that we got that right because that involves, obviously, the completion of orders, shipping product out, the collection and et cetera. So, we place all of our emphasis on that side of the equation first and we are functioning, as I mentioned earlier, properly. We're getting our product out, we're seeing nice benefits, just from that side of it.

The next phase, which people are working on now, but the emphasis was on the order to cash side, was on the creation of enhanced information reporting, global data warehouse configurations, et cetera. That's where, when those systems are fully implemented, we'll begin to see the opportunities for bigger benefits. And that's down the road a little bit. So, we still feel very good about one, what we've done and that we expect to get the benefits. But we wanted to get the order to cash piece done right, be functioning properly, make sure that we met the needs of our customers, both to the school bookstores as well as to that ultimate student. And we feel very good about that side of it.

Terry, have you put a timeframe on the 20% margin goal?

I don't think we did. I want you to know, internally there's one. Somebody's incentive is tied to it. But we said by - - hopefully by the time we finish this decade, that sounds like a long time, but that's just about four years, that we're going to be there.

Okay. And how about the timing issue, third quarter versus second?

Third if quarter versus second - - on what?

On the education business, whether there was any accelerated ordering in the second quarter that might have come out of the third within the education unit specifically?

Yes, there was. There was a little bit of accelerated net - - from the third with some early ordering. However, we're seeing some very good success and strength and so we fully expect that the third quarter is on target on that one. And again, you know, if Texas comes through, which we expect, as I was saying to Ed, I expect a little improvement on that. But we did get a little bit coming forward.

Okay, thanks very much.

Thank you, our next question comes from Fredrick Searby from J.P. Morgan.

Thanks. Terry, a couple of questions. First of all, it looks like there's kind of a sudden share shift or you're gaining share suddenly in higher Ed. And I just wondered if you could project whether that's sustainable and you see that as an ongoing trend? You had some great growth there, well above your peer group. And then secondly, if you can help us think about, I think this question was in some ways asked, organic growth or conversely what the growth rates you're seeing at Capital IQ and JD Power and a couple of these acquisitions are coming in at? And then finally, it sounds like you're almost finished on your goal of 10 million shares on the share buyback and given the robust free cash flow we're expecting and I think you are, as well, whether you would push that out and favor buying back in excess of 10 million shares, increase that goal? Thank you.

Thanks, Fredrick. Okay, well, market share and - - right now and again, we're at the mid point, is a little better than we anticipated at higher Ed. It is also a little better than we anticipated on the El-High side. And I can't tell you how exciting that is. We've spent a lot of time - - we've had some issues on our Macmillan side, our K6 base side. And we've spent on a lot of time on that one. And we're starting to see some very exciting results from all of that. And I think we're on a really good new path there. McGraw-Hill learning group, which is all the supplemental side. That's the open court, the everyday math, impact mathematics, all of the standardized instruction continues to do exceptionally well. And it is benefiting, also, very nicely from No Child Left Behind with reading first monies there.

Glencoe on the secondary school side, it continues to be the outright market leader. And they are just a terrific group and doing exceptionally well. And testing, we have strengthened that platform. And I think we're taking advantage not only of the high stakes side, where we've always had a very strong capability. But increasingly on the formative side, which is the low stakes testing, which is the larger part of the market and the growing part on that part. So, we're feeling a little better. Every - - we're entitled to nothing. We have to make things happen everyday in all of that. But we certainly like the results from all the hard work that we've put into the education side. So, there is some share gain there.

And Terry, with respect to the other two questions, how we think of Capital IQ every time I pull up Yahoo Finance, I see it and it sort of reminds me of it and I think about the product. But what kind of growth you're getting at Capital IQ and JD Power? And just finally on the share buyback, if you could just touch about having reached almost your stated goal of 10 million shares. Do you think, given where things are coming in, I imagine cash flow is coming in above expectations would you expect buyback?

Without breaking out, Frederick, without breaking out revenue projections on any of the acquisitions, as you would expect they're growing very nicely. One of the nice things about JD Power is that 65% of their business is coming out of the automotive side, which has been their strength. 35% is coming from the nonautomotive and that's growing at an even faster rate than the automotive side. So, we're very pleased with that. We will accelerate that growth even more with more expansion in the Asia Pacific region, where there's a lot of customer satisfaction, consumer-related products, whether it be in insurance, other financial, auto, telecommunications, insurance and so forth. So, it's growing very nicely. Capital IQ, as you may expect also, coming from the base it has, is growing quite rapidly and should.

And so we are a little bit ahead of where we thought we'd be right now. The integration, essentially, is complete. And as I mentioned before, the, integration with Compustat has gone very nicely. Such that you've got the data and technology platform of Capital IQ and you're now bringing other content capabilities into that platform that will strengthen it. So, that part is doing well. From the share repurchase side, Fredrick, again, we - - you know, this is - - we've been saying 3 to 5 million shares a year on a pre-split basis. And now on a post-split basis, 6 to 10 Is what we think we would be doing. And we had a 15 million share pre-split, 30 million share allotment, which assume, that if you did the 3 to 5 or the 6 to 10 on a post-split basis, that you're doing - - you're going to do that over about five years, on that part of it. So, we have, as Bob was mentioned, what was it, 7.8 - -?

8.6 million shares left in the - - .

8.6 million shares, Fredrick, left on that one. So, we could go there without authorization from the Board. But we'll continue to discuss that. We're very active on the share repurchase side, obviously. And we very much like the program and we continue to make it a big part of our total shareholder return.

Given how underleveraged you are, should we think then that just because you're pushing up against that 10 million, your pre-split, 3 to 5, that we should - - you won't decelerate the share repurchase?

I think it's fair to say that we will stay very active on this one. And the question is, how active? And that obviously depends on how the stock is behaving and all sorts of things on that one. But you can count on the fact that we're going to be very close.

Good, great quarter. Thank you.

Thanks.

Our next question comes from Lauren Fine with Merrill Lynch.

Hi there. Some of my questions have been asked. But I'm wondering, on the El-High business where you're looking for growth of 10% does that include testing? And it's unclear just how well testing is really doing. I know it's going very well. But how much of the current growth, it seems better than expected, is coming from testing? And then also on higher Ed, I'm wondering if given the strength of the first half, if you have any kind of guestimate of what full-year could look like really more for the industry? if you're more comfortable with that than for your Company. And finally on JD Power, understand some of the expansion that you're doing into Asia-Pacific. I just am wondering, as we look forward, what is McGraw-Hill bringing to the table in terms of new areas they might expand into that they might not have otherwise?

Okay, Lauren, we don't break out testing specifically, but, yes, that's a very, very exciting market. And getting more so. And not only from the high stakes side, where we now know that there are 20 states that have requirements for end of year graduation results or requirements. And that number is only going to go up. And eventually, like having academic standards, you're going to have all 50 states with some sort of graduation completion exam that way. But, we're at 20 and we're going up. And so we will benefit nicely from that, but it's really in the formative side. The low stakes side Where both classroom teachers as well as administrators are trying to continually gauge where they are, the progress they're making in order that they can be in a better position to take those high stakes tests. So, testing increasingly is going to be a bigger part of our numbers and as, that is not part of the AAP overall results on that. Let me go to JD Power, the third one, and I missed on the second one, what area was it, Lauren, that you were looking at?

Just going back to the first one. I guess what I'm trying to understand, is when you talk about El-High growing 10%, is that incorporating testing into that category?

Yes.

Okay. And the second question was really on higher Ed, that was growth of over 7% in the first half. Do you think full-year growth will still just be in the 4% to 5% range? Or do you think it could - - was the first half better than expected?

From our standpoint, we said the market would be growing 3 to 4. We're definitely going to outperform it. Right now we're running a little bit ahead of where we thought and we'll have to see. But we're having a good year.

Okay. And then on JD Power?

Yes, JD Power, again, some of the nonautomotive areas, that are doing very well right now, are in the construction and the insurance area. And most of that construction right now is on more of the residential side than the commercial side. So, it doesn't necessarily play as well to our construction business yet. And - - but all of those dialogues are ongoing. Also in terms of the energy and the aviation markets, those would be areas that we also have strength that we're also exploring opportunities. In the Asia-Pacific region, I think we can be very helpful here in terms of our own network that already exists there. The Asia-Pacific region is going to be at some point the largest region for us. And, therefore, there is a lot of dialoging that's going on as part of that right now. But the most important thing right now, for JD Power, is to make sure that from a support network, the systems, all of the administration integration, that we have, those things that will provide the most immediate synergies taking care of and the dialogues for new growth and the nonautomotive side are ongoing. And you will hear more and more about some of the joint initiatives as we go.

Great, thank you very much.

Thanks, Lauren.

Thank you. Our next question comes from Steve Barlow with Prudential.

Thank you. You talked about guidance had to do with the numbers. It looks like $0.08 to $0.09 hit on the acquisitions. That's down from your $0.16 to $0.17, Is that the right way to think of that? Secondly, Pearson says that they were number 3 in social studies, are you number 1?

Well, on the latter first, Steve, again I'll lead to there are so many people that are number 1 out there. There's not a lot of room, but we'll let the end of the year, when all the results are in, we're doing really well. And you know that in the secondary market side, Glencoe's strength has been - - one of their many strengths, has been on the social studies side. And I think when all is said and done, they're going to be clearly at the top on that one. But again, when we take a look at El-High overall and we take a look at the total available dollars that are available out there and here we are, the minimum expectation that you should have for McGraw-Hill is a 30% market sure. A capture rate of 30% of total available dollars. And in a more robust market, we are going to probably do a little bit better. We are definitely going to be higher this year and we're very pleased at that - - on that one.

Now, our own tracking and everything else is also just internal tracking, but we're tracking well above that 30% now. So, we will have to see at the end. And again, that's total available dollars. We're not competing in all of the 900 million new adoption markets. We're about 7% shy of that. To we're about 93% of the opportunity. And a lot of decisions that go into that have to do with profitability and so forth. And our numbers are going to be based on total available dollars will be pretty good. And on the $0.08 to $0.09 dilution, go ahead, Bob.

I think, Steve, the $0.16 to $0.19 was on a pre-split basis. $0.08 to $0.09 is on a post-split basis. So, we're still tracking to where we had indicated we thought our dilution would be at the beginning of the year.

Okay. That helps a lot. And, Terry, it sounds like you've inched up your '06 adoption numbers. I recall from a previous call, you're thinking sort of 750 million, it looks like you're thinking 800 now?

Yes, and again,Steve, it's really difficult because with some ins and outs, the number could move up a little more. We said 750 to 800, just as a broad gauge. I think you're probably talking somewhere around 800. And again, given some postponements or whatever or the residual sales that it will float a little bit. We will have a better number towards the end of the year on that one, but I'd say going with about 800 million is probably good.

Thank you.

You bet.

Thank you. Our next question comes from Brandon Dobell with CSFB.

Hi, thanks. Just one quick one, Terry. In the education space in the El-High market, wonder if we could get a sense of what the states are expecting or what you guys are doing in terms of providing teachers in the schools and students with free product, workbooks, incentives that kind of thing? Just trying to get a sense of how market share shifts or how market share shift or how market share numbers are being driven by what else you guys are doing up front with some of the giveaways that I know K-12 is famous for? Thanks.

Yes, that's not a very good thing to be proud of in terms of a - - of the industry on that one. You're talking about free with order in all of that.

Yes.

It's a part of the industry. We are - - we watch that very hard. And there are certain areas where we do. But where we do is in areas that are going to help them get done what they need to get done, to get the results. And therefore, where we focus in is on remedial and intervention kinds of materials, aimed at underachieving students. Students that are falling below grade level and helping them with that component. And what we do is package that altogether. If you're getting into just a giveaways, it's obviously a defeating proposition. The most important thing in terms of an understanding within the marketplace is that it is got to be all about student achievement and school performance. And anything that is focused on doing that is the right thing to be doing.

And therefore, we will be supportive in how we package certain things but it's not a very profitable notion if you're get giving a lot of things away. I don't believe that we have to compete in terms of the quality of our materials on free with order. And it's a practice that is not a good one on that part. So, we do do that. But we package it appropriately, , with focus on intervention and remedial products.

Okay. And then one quick one, if I could, is a follow-up. Could you talk a little bit about the product offering in the intervention market? is it more a software product, a combination of software and print? And then kind of who do you out there as the most likely buyers, is it large districts, small districts, urban, Title 1 monies, that kind of thing? Thanks.

Well, it really is across the board. It depends on how the school is doing overall. If it is a suburban school in a fairly affluent area, they're probably - - their numbers and their results and some of the need for intervention and remedial product is going to be lower. And therefore the focus really is going to be on where the problems are and that is in the urban centers with inner city schools. And, for example, the product that we just launched for grades 2 through 6, a reading supplement called Kaleidoscope, the first major customer on that was Los Angeles Unified. And I expect to see more of that kind of focus on the urban markets and it will be coming out of our McGraw-Hill learning group. Which focuses on that, predominantly on that.

Thanks a lot.

You bet.

Thank you. Our next question comes from Michael Meltz with Bear Stearns.

Hi, a couple of questions for you. You walked through the Texas situation with us. Can you just clarify your guidance raise or lift on the EPS side now, does that include a full contribution from Texas? And then secondly, on that issue, you had talked about possibly helping out with the shipments of books. So, are you saying there could be a margin impact at the education group for full year '05? And then I have two follow-ups for financial services.

Okay, well, first of all, the Texas situation, we have couched our numbers, but we fully expect Texas to fund. And again, you've got, in these disciplines, you've got 12 to 18-year-old books in all of that. And I really don't think they're not going to open up the school year. And - - for 4.3 million kids. So, I think Texas will be there and so forth. However, we are having a very good year and our numbers are not predicated on Texas alone. We should do a little better with complete funding with Texas. But we're on track with our guidance, even if Texas does not come. Enough on that. And the second one had to do with shipments. Yes, in Texas you need to use Texas trucks. Your warehouse has to be in Texas. Everything is Texan on it. It's one of the few states where we don't ship directly, they take care of that component on that one. We need to see what they decide this week. They will then be putting out the shipping schedules. Remember schools start between the 8 and the 17 of August. And therefore, what we've made clear to them, is that we will do whatever it takes to help you get those materials there. And it's up in the air right now as to how much help they want or don't, on that part. And even still, the numbers are a lot bigger and therefore to have any real margin impact on picking up the share value, I don't see that.

On financial services, you had a comment regarding S&P rating with non-traditional products. And I think it's one of the first times that I've ever heard you say there was some softness there will bank loans. And I think one of the evaluation product lines. Can you just talk about that a bit? And then can you just give a little bit more clarity regarding regulatory issues? Maybe with your discussions at the - - with SEC, has that accelerated in recent weeks? I know what you said regarding a resolution before year end. But could you just talk about the code of conduct type discussion?

Okay. First on the non-traditional side. Again, all of those products, financial strength, rankings for insurance, counter-party ratings, bank loan raise; all of those areas are areas that are not tied to new issuance. And you'll see some fluctuations at any given time. I dont see any softness in bank loan ratings. For the second quarter, it wasn't as strong as it was a year ago. But I think what you'll see is just fluctuation in there based on certain activity. I dont' see a pull back in those particular areas. It was just that counter-party ratings and financial strength ratings didn't have a lot more activity. Those are still very robust areas. Very expotic. And we like the fact that we have a product line or a product grouping if you will, in the ratings area that just is not tied at all to new issuance activity. And so it gives us a little bit of a cushion, if you will, on any volatility. Another cushion in terms of the volatility. So, I wouldn't read anything into that. The bank loan rating market is still very strong. It just, in terms of all of the things in the non-traditional ratings area, the others just were a little stronger.

On the regulatory side, and again, things will come up from time to time. And I want to make sure that you're hearing from us as to what they are. There was this House resolution 2990, came up out of the blue. And basically motivated by one particular individual who got his Congressman excited about putting this forward. And once the House Sub-committee really got an understanding of what it was there was a lot of postponement and we'll see where that goes, on that one. So it's more of an educating process that we're going through. The relationship with the SEC has always been good and it has to be good. Our relationship with government agencies is obviously a very important factor on this one. The SEC is a little bit in flux right now. As you knew, we just had two new appointments by the President for the Democratic members on the Commission. And we're waiting for confirmation, which should be starting very shortly on Christopher Cox, on that one. So, not a lot is going to happen in the immediate period until, I think the Commission gets organized and focused and the confirmation process is behind. But more importantly than that, we have - - we are very supportive of the designation process, a voluntary oversite function.

We have made - -we have worked with CESAR (ph) and IOSCO in Europe, the security regulators and the security commissioners in terms of forging a code of conduct, which we have. We've incorporated a lot of that language into our own code of conduct. The SEC prior to where we are right now has made it very clear that that's the kind of language that's acceptable to them as well. We just have to bring some of this to some resolution on that. And so we will go through all these different things. But the most important part is the upholding of the fact that these are independent, objective opinions, protected by the First Amendment and nobody to date has quarrels with that and shouldn't. And it's why the open market of the capital formation process works so efficiently, and so forth. And we will continue to work that and whatever comes up, we're going to tell you exactly what we think it is and where we stand on it. But hopefully, by the end of this year both between Europe the United States and our various functions that this will have been resolved and we will have a framework, which everybody understands and can work with.

And so it is just one that when things do come up the question is always is "how material is that?" and all that. We absolutely have no concern about any adverse affect that could influence the business of S&P. And - - but we will continue to make sure that you're availed of everything we know.

Thank you. We have two remaining questions. Our first question comes from John Janedis with Banc of America Securities.

Terry, just first, briefly on Texas. Not to beat a dead horse but is there a drop dead date to get the books to the schools on time in terms of the resolution here? And if not what are the implications. And then separately, on your independent research what percentage of the business is related to the global research settlement versus non-settlement terms? And if you could say which segment is growing faster and how much of the revenue would you classify as independent (ph)?

John on the Texas; well, school starts starting between August 8 and the 17. And therefore my guess is that the fact that they've made a lot of progress this week is encouraging. But that's why we fully expect to hear something substantive this week. And of course the Governor interceded and he called, on that part. So, my guess is that we should hear something this weekend. Shipping schedules are ready to go. And we should be in pretty good shape on that one. But worst case scenario that the Texas school closed and nobody goes to school. Have we already printed the material and bound them and got them in warehouses? You bet. And so we're all set to go on that part. But the likelihood the dire outcome, I don't think is very likely on that part. So, I think we'll hear something this week. We're very close to a point where they need to do something. And if they don't I'm sure the Governor will. And the other question was on equity research, settlement, non-settlement. Well, we've been at this a long time. In fact, on the five star ratings Don, help me. I think we started publishing the five star, four star, three star in 1986, is that right?

Yes.

And so our record in terms of the performance in all of the categories has been well and has done well. As I've said all along, what is challenged about that business for us is the business model. We're not a brokerage house. We can't pass along and other kinds of businesses based upon the equity research that we put on that one. And my concern is that the business model has to to get a good deal more robust. The settlement process, which is the 435 million roughly over five is years, is very helpful because we're doing quite well in the settlement money. But in the context of all of that, all that will prove is whether or not there is a desire for, by the market, independent equity research. And if there is, and that's what this process stipulates, then we'll be in terrific shape. We're covering some 2,000 stocks with 110, 115 analysts. And we have brought comprehensive coverage and all of that. But if we can't get to a better business model then it doesn't make a lot of sense. And the market will tell use whether or not there's a need for that independent equity research.

We are of the belief that the market does want it. And wants the kind of quality and capability that we have. But we have to play that out. So, the broader numbers are in the non-settlement component. The settlement is the new money that is short term. And we'll have to see what the process - - what happens to that as we get close to the five year mark. Whether they re-up or decide they want to take it on themselves or do away with. So, we'll just have to see that one. But obviously the larger dollars are going to be in the non-settlement. The settlement dollars, right now, are helping to pay for a lot of things that give us time to make the determination on independent equity research.

Thank you. Our final question comes from Brian Shipman with UBS.

Thanks. Two questions. Assuming you're growing a bit faster than the higher Ed. market, which is in the 3% to 4% range; you still grew that division, the higher Ed., professional and international at almost 11%. Can you expand a little bit deeper on what pieces are driving that revenue growth? And then separately can you remind us where you stand on expensing options at this point? Thank you.

Okay. Brian, on the higher education side; we've seen some very good strength in all three categories that we have imprints in. In most important with the science, engineering and mathematics grouping. In that particular grouping I lifted a number of very large texts that are doing very well with big support networks and so forth. And that's one of the things that's helping us this year, I think. But the business economics side, as well, is selling here and around the world quite well. And those support networks are helping it as well. So, we've just got some very big pieces. In professional, when you have a revision of Harrison's the Principles of Internal Medicine, those are very very big components on that one. So, we're doing well in some very big revision areas. But all three categories are selling well on that one. So, again, it's a little early. We're ahead now, obviously. And we have to see where we finish up. But right now it's looking pretty good for where are. And - -

Terry, could you touch on international a little bit please?

Sure. The international side is that - - is clearly benefiting from a lot of the switch to American styles, American degree programs taught in English that are cropping up outside of the United States, all over. We talked a little bit last time about some of the competition for foreign students. First of all, the number of foreign students - - or the number of students overall are going up. The number of foreign students going to elite universities is going up. One of the issues that we had about two years ago; we had gotten up to about 680,000 students in the United States, foreign students going to universities here. Well, that equated to about a $13 billion market in terms of broad consumption of the things those students were doing while they were here. That was not lost on anybody. And again given some of the post-9/11 and some of the other issues having to do with visas, that population has declined significantly. And therefore those foreign students are going to Great Britain, they're going to Germany, Australia, New Zealand, Singapore, Thailand, Taiwan and in those kind of programs. So, we're seeing a much more active international in its own right, just because of the volume of students going up. But also in terms of foreign students. It's something that in the United States we need to address. Some of these implications are too restrictive and we need to deal with that issue.

And the options question?

Yes, on the expensing we were all set to go. The mandate was end of June, July 1. And of course that got postponed again to the end of year. And our understanding is that that's going to become the requirement and we're ready to go.

So you won't expense options in the second half.

No, we will not expense options in the second half.

And can you indicate what options expense would have cost you per share in the second quarter, had you expensed them?

Yes. You can pull that together. Bob, you want to give it to him?

Yes. It would have been $0.03.

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

Thank you all very much.