標普全球 (SPGI) 2006 Q1 法說會逐字稿

Good morning and welcome to McGraw-Hill Companies first-quarter 2006 earnings call. At this time I would like to inform you that the call is being recorded for broadcast and that all participants are in a listen-only mode. At the request 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 participants, McGraw-Hill has made the presenter slides available on the Internet. To do that, go to http://www.mymeetings.com/nc/join. (OPERATOR INSTRUCTIONS) You will be prompted to enter your name. And that conference meeting number is PG 7821013. The password is McGraw-Hill, all caps with a space between McGraw and Hill and the event type is conference.

This call is also being simultaneously webcast for McGraw-Hill's Investor Relations website and will be available for replay about two hours after the meeting ends by both phone and the web for seven days. (OPERATOR INSTRUCTIONS)

I will now turn the call over to Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. Sir, you may begin.

Thank you and good morning. And thank everyone for joining us here at the McGraw-Hill Companies first-quarter 2006 earnings conference call. I'm Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. With the 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 first quarter 2006 results. We trust you all had an opportunity to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.McGraw-Hill.com/investor_relations. (OPERATOR INSTRUCTIONS)

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call, however this call is for investors and we 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 one hour. After our presentation, we will open the meeting to questions and answers. It is now my pleasure to introduce the Chairman, President, and CEO of the McGraw-Hill Companies, Terry McGraw.

Thank you, John, and welcome to our review of the McGraw-Hill Companies first-quarter results and thank you all for joining us this morning. I'm Terry McGraw and as Don stated, joining me for today's conference call is Bob Bahash, Executive Vice President and Chief Financial Officer of the McGraw-Hill Company. I will start today's review by discussing the performance of our businesses and the outlook for the rest of 2006. Bob will then review our financial performance and expectations for the year. And of course after these presentations as Don stated, we will go in any direction that anybody would like to go.

Okay. Earlier this morning we announced first-quarter results. Revenue increased 10.9%. Diluted earnings per share from continuing operations were $0.20 and that included a $0.04 for incremental stock-based compensation that is a part of accounting rule 123(R) and that is on an annual basis the $0.13 we talked about in expensing stock options. What is new is that it also included another one-time charge of $0.04 for the elimination of the restoration of stock option program. So we are encouraged, very encouraged by the start of this year and confident in the guidance provided two months ago.

Excluding the expensing of stock options, we still expect earnings per share of $2.36 to $2.41 in 2006 with more robust market opportunities taking place -- taking shape next year, most notably in the K-12 education space. We expect a return to double-digit earnings growth in 2007.

The economy continues to look healthy. David Wyss, S&P's Chief Economist, now expects GDP growth of 3.5% for the year and that the Federal Reserve is nearly done tightening interest rates. Another 25 basis point rate hike is anticipated when the Fed meets on May 10. Capital spending remains strong. State finances are in good shape and that is according to an update last month from the National Conference of State Legislatures. Incidentally that is a pretty good website to monitor state activity. Most states are two-thirds of the way through their current fiscal year. Revenue collections are above original targets in 44 states. That of course is good news for education.

With that, let me now go to our operations and give you the current outlook in more detail. Let's begin with McGraw-Hill Education. The operating loss in a seasonally slow quarter for education was $97.1 million and that includes an incremental $9.7 million for stock-based compensation and the one-time charge for the elimination of the restoration stock options. As everyone following education knows, the first quarter is seasonally slow and represents only about 10% of the market's annual sales.

McGraw-Hill's School Education Group produced an 18.5% revenue increase in 2005 and now faces tougher comparisons in 2006 in the elementary high school market, which at best could be flat or could be down as much as 4% after a 10.5% increase in the market last year. That challenge was evident in the first quarter. Last year the McGraw-Hill School Education Group reported a 12.6% increase in revenue in the first quarter. This year revenue for the same period was off 1.1% to $146.5 million, a reduction of approximately 30% and the state new adoption challenger is the major factor in limiting this year's potential.

The two big adoptions this year are in that K-12 science in Florida and the K-8 social studies in California. The high schools in California are also buying social studies, but these sales will be reflected in the open territory results. In California with about 25% of the districts reporting decisions by the end of March, we are encouraged by the winning of some very important early adoptions in Fresno, San Bernardino, Ontario, Anaheim and Glendale.

We are also continuing to show strength at the high school level. In Florida, we expect to lead in the secondary market which offers the biggest dollar volume opportunity in that state. The strength in the secondary market will help offset a lackluster performance in the K-5 Florida science adoption. Predicting the exact dollar volume of first-year state new adoptions is never easy and in both California and Florida we are beginning to see a shift in purchasing plans. It now looks like more buy may take place in the second year of the adoption than previously anticipated. California never buys 100% of adoption in the first year, so we had expected to see 70%, 75% of the social studies adoption potential realized in 2006. Now it looks California will achieve about 65% of the potential in year one but it is hard to tell.

In Florida, six large districts have indicated that they may postpone buying science this year or do a partial purchase. Again it is still too early to predict how that will turn out. Sales in open territories always develop later in the year, so it is clearly too early to predict development there although it is going to be an important part of this year's results.

We are aggressively going after sales in the open territories with important new products. Treasures is a basal K-6 reading program that is aligned with No Child Left Behind and reading first requirements. Its competitiveness is enhanced by two related supplemental series designed to help with special classroom needs, Reading Triumphs for students that require an intervention and Treasure Chest for English language learners. Last week Treasures won awards from three professional design organizations for its evaluation components and promotional materials. Innovative design and packaging are important in capturing the market's attention, so the recognition that Treasures has achieved is very gratifying.

Another important addition to our elementary list is Real Math. This is a new skills based math program that employs the same instructional methodology as our highly successful open court reading. Jamestown Reading Navigator is an online reading intervention program for secondary students which is currently being piloted in more than 50 districts. Two other new textbook programs are Reading with Purpose for middle schools and Readers Choice for high school.

In the testing market, our custom contract revenue increased in the first quarter due to additional work related to statewide assessment programs in Florida, Colorado and New York. That is Florida, Colorado and New York. The testing market is continuing to shift under the impact of No Child Left Behind Act. To meet the annual testing requirement that begins in this academic year, states are implementing more customized tests. As a result, orders for the more profitable off-the-shelf tests are declining and our margins here are under pressure. To meet this challenge we are investing in technology to improve our efficiency in developing, delivering and scoring custom assessments.

Moving over to higher education, professional and international, revenue in the first quarter increased 5.3%. In the U.S. college and university market, two of our imprints, science, engineering and math as well as humanities, social science, and languages got off to a good start. This is an off cycle year for the business and economics, so as expected sales were off modestly after a strong performance last year. We still anticipate approximately 5% growth in this market in 2006 and we expect to outperform it.

Higher education products sold well in Asia and India. We also benefited from solid sales performance in the Canadian school market when the government stepped up funding in two provinces, British Columbia and Ontario. We also had solid results in professional markets from our medical titles and from three titles that made national best-seller lists, Chasing Daylight by my good friend Gene O’Kelly, the late Gene O’Kelly; The Millionaire Maker by Langemeier; and the Millionaire Real Estate Agent by Keller.

We also continued to build on the recognition created over many years with Harrison's Principles of Internal Medicine, the world's best-selling medical text; three new titles and dynamic specialties will extend the Harrison's brand globally. Harrison's Rheumatology by Dr. Anthony Fossey; Harrison's Endocrinology by Dr. Larry Jamison; and Harrison's Neurology by Dr. Stephen Hauser.

Summing up then for the McGraw-Hill education segment, very encouraging results in the secondary market, mixed results in the elementary market, good start in California social studies, strong performance in the secondary especially Florida science. Testing is growing the top line, but the market shift towards customization is placing some pressure on margins. Higher education shows promise and we are investing in technology to improve the efficiency.

Okay, let's move over to the Financial Services segment. Again another very solid quarter in Financial Services. Revenue was up 9.6% and grew 13.7% on a non-GAAP basis, which excludes revenue last year of $33.5 million from corporate value consulting which was divested at the end of September and excludes the current year's revenue from Vista Research, which was acquired on April 1, 2005; and CRISIL Ltd., majority interest was acquired on June 1, 2005.

Operating profit grew by 13.1% and that included incremental expenses of $8.9 million for stock-based compensation and the one-time charge for the elimination of the restoration stock option program. The operating margin expanded to 41.9%, up from 40.7% for the same period last year. That represents a healthy start to the year and the double-digit top and bottom line growth that we projected. We benefited once again from growth in structured finance; solid increases in both our domestic and international rating; growth in the ratings products and services that are not linked to the new issue bond market, our nontraditional products; growth in data and information products and services; growth in products and services related to our indexes. In short, there were many contributors from a diversified portfolio.

After the typically strong close in the fourth quarter last year, we pointed out that the pipeline for the first quarter of 2006 still looked very good to us and that was the case. New issuance dollar volume in the U.S. residential mortgage-backed securities market was up 11.3% in the first quarter this year versus the same period last year. Commercial mortgage-backed securities issuance was up 53.2%. Asset-backed issuance was up 27.9. Collateralized debt obligations were up 75.4. The total U.S. structured finance market was up 24.1%. Public finance declined 25.7%. U.S. corporate new issuance was up 22.1%, and that is very encouraging.

The corporate market was also strong in Europe with first-quarter issuance climbing 17.5%. It was driven by merger and acquisition activity and some opportunistic financing in anticipation of interest rate increases by the European Central Bank. Issuance in the European mortgage-backed securities market was up 9.5%.

All our international regions -- that would be Europe, Asia-Pacific, Latin America, and Canada, showed increases in the first quarter. After a strong finish last year, Europe grew more slowly in the first quarter. Nevertheless international ratings produced just about 36% of ratings revenue in the first quarter, in line with the same period last year. These figures are all based on reports from Securities Data Corporation, Harrison Scott statistics, and S&P estimates.

Standard & Poor's is a leading provider of data and information to the securities industry. These productlines had a strong first quarter. Securities information products such as Ratings Direct and Ratings Express performed well. The growing customer demand for fixed income data is another manifestation of the growth of our business in international markets, the demand for securities information products was driven by growth in CUSIP issuance volume. We issued 19,700 in the first quarter, an increase of 13.2% over last year, showing good strong demand.

We continue to invest in our data and information platform, adding functionality and data, a combination that enables us to win new customers. At the end the first quarter, we had more than 1400 clients for capital IQ products and services, up from 1000 just a few months ago. Exchange traded funds based on S&P indexes attracted new assets driven mainly by I shares and SPDRs, S&P depository receipts. Assets in these exchange traded funds increased 21.4% at $137.7 billion at the end of March versus the same period last year.

We are also benefiting from the increased adoption of the S&P Citigroup indexes for benchmarking and data. In March, Rydex launched six new exchange traded funds based on the S&P Citigroup pure style indexes. Innovation in this market is the key to growth and we have been seeing some notable creativity in the first quarter.

S&P is also developing a new series of industry focused indices called the S&P select industry indices. In February, State Street Global Advisors launched three exchange traded funds based on these indexes; 15 more exchange traded funds based on these indices are now in development. The S&P Asia 50 futures contract was launched in mid-February on the Chicago Mercantile exchange Globex system and is starting to attract attention from traders.

In February, we officially launched a joint venture, the Standard & Poor's CITIC Index Information Services Limited. The new company calculates and commercializes the S&P CITIC equity and bond indices for China. The S&P Case-Shiller Metro Area Home Price indices were announced in March, creating a new way for investors to participate in the housing market without buying real estate. The indices are designed to be reliable, authoritative, and readily available measures of residential housing prices in the United States. Futures contracts based on these indices will begin trading shortly and again on the Chicago Mercantile exchange. And I can assure you there is more to come.

As we look ahead to the second quarter, the pipeline for ratings looks very healthy. Sequentially comparisons in dollar volume issuance levels for the structured market achieved in the first quarter this year and last year's second quarter may be worth considering for a moment. As you can see in the chart, dollar volume issuance in the U.S. structured market was $461.4 billion in the first quarter, a year-over-year increase of 24.1%. Last year in the second quarter new issue dollar volume in the U.S. structured market was $469.6 billion. Later in the year comparisons -- here I go -- will get tougher, but right now that pipeline still remains quite strong. For now momentum in the U.S. residential mortgage-backed market is carrying over into the second quarter and that pipeline is full.

Mortgage rates remain within historical norms and are low enough to keep home purchases, home improvement and debt consolidation markets active. Sub prime and affordability products are continuing to fuel our part of the market. We still expect the U.S. residential mortgage market to cool off later in the year. The pipeline for the U.S. commercial mortgage-backed securities appears very healthy, driven by improvement in commercial real estate fundamentals, investor demand for relative yields, and refinancing of maturing deals.

Credit card activity and increases in student loans and a pickup in auto securitizations should keep the asset-backed market moving ahead as well. U.S. CDO issuance looks also robust. There may be more activity in public finance. Historically the second quarter is one of the busiest periods in the municipal sector, although weakness in refunding activity may offset the pickup in new money volume. We will see.

We are fairly optimistic about continuing strength in the corporate market. This is a plus. More debt financed merger and acquisition activity remains a wild card. We remain optimistic about growth prospects in international markets. The pipeline in Europe is building and the outlook is positive for the other regions.

Finally I want to update you on the regulatory outlook. We obviously continue to work with the Securities and Exchange Commission, meeting with commissioners and key staff to complete work on the voluntary framework for the oversight of Nationally Recognized Statistical Rating Organizations, NRSROs. We also support the implementation of a more formal, transparent, and expedited designation process as reflected in the SEC's proposed rule, but without involving the SEC in the substance of the rating process.

We also worked with the International Organization of Securities Commissions, that's IOSCO, on the codes and principles applicable to rating agencies. S&P subsequently in October 2005 issued a code of practices and procedures which is consistent with IOSCO’s code of fundamentals and that updates S&P's 2004 code practices and procedures. We continue to believe that any new or currently proposed legislation or regulation would not have a materially adverse effect on Standard & Poor's financial condition or its operations.

So summing up for financial service, we are on track for another year of double-digit top and bottom line growth excluding the impact of corporate value consulting and stock-based compensation. Solid growth prospects in international markets, growing sales and data and information, maintaining operating margins at least at last year's levels.

Finally let me turn to our information and media segment. Revenues increased 29.9% or $52.1 million. In large part that includes $43.8 million from JD Power and Associates. Operating profit declined by $3.1 million to $1.7 million. That reflects an incremental $7.6 million in expenses for stock-based compensation and the one-time charge for the elimination of the restoration stock option program and the impact of $5.3 million from the JD Power and Associates acquisition.

Our Broadcasting Group is off to a really terrific start. Revenue for the first quarter increased 20.3% to $29.2 million. The Super Bowl on ABC, political advertising and solid improvement in local and national time sales were all positive factors. We're seeing continued strength in the second quarter, with pacing up 12% at the end of March. Revenue for the Business-to-Business group increased 31.4% and again that is mainly due to the acquisition of JD Power and Associates.

We are pleased with the progress of JD Power and Associates since we acquired the company on April 1, 2005. JD Power and Associates is one of the nation's latest greatest brands, and by providing a new direct link to consumers and pursuing new collaborative opportunities with many of our leading brands including Business Week, Standard & Poor's, McGraw-Hill Construction, and Platts, it will enhance growth prospects for our core business information platforms. We have been working very diligently on these collaborative projects and some promising new ventures will be introduced soon and we will keep you posted there.

JD Power also is a solid business that is producing growth in both the global automotive and nonautomotive market. There is a very good pipeline of business heading into the second quarter and again for JD Power a little under a quarter of their revenues comes from outside the United States and two-thirds of that comes from the Asia-Pacific region, which is a very, very important region for all of our businesses in terms of growth opportunity.

Ad pages in Business Week's Global edition were up 2.9% in the first quarter as measured by the Publishers Information Bureau. A growing percentage of advertisers are buying a combination of print and businessweek.com. As a result, first-quarter advertising revenue on businessweek.com was up 79.5%. That represents 12% of Business Week's ad revenue in the first quarter. The development of businessweek.com also represents a shift from a magazine centered business. The goal now is to leverage our editorial expertise so each day we provide online users around the globe valuable insights on trends, important news, business, and financial analysis as well as services.

We are also focused on costs at Business Week. We have shut down the international editions. They will now go to the online version and we've cut the circulation rate base to 900,000. This month we also went from printing Business Week in four plants to three, a step that also will increase operational efficiency. We will continue to move in this segment from a traditional publishing model serving readers and advertisers to one that provides news and information and text, audio, video format, data and analytics, workflow tools and services, so communities that we serve in business, energy, aerospace, defense, construction can interact and transact business.

That transformation is already well underway at McGraw-Hill Construction network. We took the latest step last month with the transformation of Sweet that is a 100 year old print product to a network for products. We are connecting 120,000 design and construction professionals in the network where they can access 20,000 CAD drawings, 3400 three-part specifications, and materials for more than 10,000 building product manufacturers. In taking this step, we have created a new industry standard for researching, locating, comparing, specifying and purchasing building products on the desktop. Our strategy is simply this, through workflow integration -- and you'll hear a lot of that -- through workflow integration we will build even stronger ties to this community.

Okay, summing up the information and media, a solid start for broadcasting in an election year; more progress at JD Power; improvement at Business Week and businessweek.com. Fundamental transformations are underway to create higher margin value added products and services in the dot.com world. And that wraps up our review of operations.

Now before I move over to Bob for the financials, any review would be incomplete without noting some of the important decisions that we have been taking in recent months that will contribute to our performance in the future. To enhance our long-term growth prospects, we restructured some of our operations at the end of 2005 and we eliminated approximately 500 positions. That decision was announced in early January. We changed the leadership of the information and media segment, naming Glenn Goldberg as President. We continued to refine the portfolio. In information and media in the first quarter we divested two noncore businesses in energy, Our magazine, a monthly for the power generation industry and e-source, a subscription based research service.

We also sold a facility in Dubuque, Iowa which houses some of our higher education operations. We will replace it with a new, more efficient facility. To reduce future expenses, we eliminated our restoration stock option program which was announced on March 30. There also will be a significant reduction in the number of stock options granted as part of our new long-term incentive program that we introduced this year. Now we are emphasizing the use of restricted performance shares. They will be earned over a three-year period for achieving earnings per share goals.

We stepped up the share repurchase program and we increased the dividend. Returning cash to shareholders through the payment of dividends and share buybacks is an important measure of our commitment to producing total shareholder value. To take advantage of our scale and improve our productivity, we are aggressively driving our global resource management program across the entire corporation as we build on our business process management capabilities. This involves more than expanding our global network for print vendors. This is a very important initiative and we are beginning to benefit from it, but global resource management is a much broader concept than just offshoring. It means new opportunities to grow. It means looking across the Company to take advantage of horizontal leveraging opportunities that were not possible several years ago.

By standardizing operations, workflow tools and support services, we are in the process of creating greater operational efficiencies and enhanced global capabilities. That is why we have said that we expect our profits to grow at a faster rate than revenues in the years ahead.

Okay, that completes the review of the operations from my standpoint. Let's hear from Bob Bahash on the financials and those expectations.

Thank you, Terry. In the first quarter we repurchased 18.4 million shares at a cost of $994.5 million. The total is comprised of 3.4 million shares that remained in the 2003 program plus 15 million shares authorized under the new share repurchase program the Board approved in January. In the new program, the Board approved the repurchase over time of 45 million shares or 12.1% of the Corporation's outstanding shares of 372.7 million shares at the end of 2005.

The earnings guidance for this year assumes a benefit of approximately $0.02 to $0.03 from the 2006 share repurchase program. The diluted weighted average shares outstanding for the first quarter of 2006 is 377.3 million shares, a 9.3 million share decrease compared to the first quarter of 2005 and a 5.2 million share decrease compared to the full year 2005.

Our cash position at the end of the first quarter was $180 million, a decline of $569 million from December 31, 2005. The decline is primarily the result of payments in the first quarter for share repurchase activity.

Now of the 18.4 million shares the Company acquired during the first quarter, we acquired 8.4 million shares of the Company's common stock from the holdings of the recently deceased William H. McGraw. The shares were purchased at a discount of approximately 2.4% from the March 30, 2006 New York Stock Exchange closing price through a private transaction with Mr. McGraw's estate. This transaction settled on April 5, 2006 at an amount of $468.8 million and as a result we are now in a debt position and have issued commercial paper to fund this purchase. But we were essentially debt free in the first quarter and we therefore had net interest income instead of interest expense.

Net interest income was $2.5 million compared to $700,000 in interest expense a year ago. With the return to the commercial paper market, interest expense will increase in the second and third quarters. By this fall we expect to return to a surplus cash position. For 2006 we now expect approximately $14 million to $15 million in interest expense primarily attributable to rising interest rates.

As a result of FAS 123(R), the Company began expensing stock options in 2006. There is more of an impact in the first quarter of 2006 because of the residual expense from previous option grants that had not yet vested. As previously stated, we will incur an incremental $0.13 of expense in 2006 as a result of this accounting change. But the new program has changed and has skewed as Terry mentioned more toward restricted stock and less toward stock options.

Let me describe the impact of the new stock-based compensation program as well as the impact of the elimination of the Company's restoration stock option program. In the first quarter of 2006 the Company incurred incremental stock-based compensation expense of $48.4 million, which includes a one-time charge of $23.8 million from the elimination of the Company's restoration stock option program. This represents $0.04 for the incremental expensing of the new program I just referred to plus an additional $0.04 one-time charge for the elimination of the restoration program. In terms of its impact on the segments, McGraw-Hill education's first-quarter stock-based compensation expense increased $9.7 million and that includes the one-time charge of $4.2 million from the elimination of the program.

Financial Services first-quarter stock-based compensation expense increased $8.9 million. That includes a one-time charge of $2.1 million from the elimination of the restoration program and information in media's first quarter stock-based compensation expense increased $7.6 million, which includes a one-time charge of $2.7 million from the elimination of the program.

Finally with regard to the corporate area, corporate's first quarter stock-based compensation expense increased $22.1 million, which covers both corporate and shared services personnel and this expense includes the one-time charge of $14.7 million from the elimination of Company's restoration stock option program.

Let's now look at our corporate expenses. Corporate expenses increased $17.7 million in the first quarter and of course were driven by increased stock-based compensation. Excluding the increase in stock-based comp, corporate expenses declined $4.4 million in the first quarter and that was due primarily to the gain on the sale of the Dubuque Iowa office and printing facility. Excluding incremental stock-based compensation, corporate expense is expected to increase only modestly in 2006.

In 2006, we still expect dilution of $0.03 to $0.04 from the acquisitions made in 2004 and 2005. They will be cash neutral. In 2007, we expect these acquisitions will be cash positive. The effective tax rate in the first quarter was 37.2%. We expect to maintain that rate for the rest of the year absent any federal, state, or foreign tax law changes or changes in the locational mix of our income.

Let's now review capital expenditures, which includes prepublication investments and purchases of property and equipment. Net debt prepublication costs and prepublication amortization will strongly influence results in the education segment this year. In the first quarter, our prepublication investments were $62 million compared to $49.2 million for the same period last year. For 2006, our current estimate for prepublication investments is approximately $315 million. This is driven mainly by the el-hi products which we are developing to realize significant opportunities in 2007 and subsequent years. However through efficiencies, technology and global sourcing, we anticipate a reduction in spending from our original projection that was $340 million.

Purchases of property and equipment were $11.6 million in the first quarter compared to $17.5 million for the same period last year; however, we do expect this to ramp up and for the full year we expect $200 million as compared to $120 million last year. The increase is primarily driven by investments in the construction of a new datacenter where construction will begin later this year, the new facility for McGraw-Hill education in Iowa and technology initiatives at Financial Services.

Now for the non-cash items. Amortization of prepublication costs was $22.5 million for the first quarter as compared to $25.2 million in the same period last year. We expect $250 million for 2006 as a result of new el-hi programs we are publishing this year.

Depreciation was $28 million for the first quarter compared to $25 million in the same period last year. We expect it to be $[30] million in 2006, reflecting the higher level of capital expenditures in 2006 and also the full year of depreciation from capital expenditures made in 2005. Amortization of intangibles was $12 million in the first quarter, compared to $8 million in the same period last year. For 2006, we expect $50 million. The increase is driven by 2005 acquisitions.

Thank you and now back to Terry.

Okay. Thanks, Bob, and again this is the first quarter and it is our traditionally very small quarter because of the fact the seasonality of education being more of a third-quarter business. But still nonetheless we're very encouraged by our start this year and we are confident again in the guidance that we have given.

With that, let me take it back to Don and to your questions.

Thank you, Terry. Just a couple of instructions for our phone participants. (OPERATOR INSTRUCTIONS) Now we are ready for the first question.

Peter Appert, Goldman Sachs.

Terry, you cite some soft starts for the science program in Florida at the K-5 level. Any broader implications from that?

No, again science overall -- that K-12 adoption is quite strong. Middle and high school is doing exceptionally well. We are behind though on the K-5 side. Essentially what we have done is customized a national edition for that market and are dealing with the intervention and remedial side of it a little bit more. But it is softer than we would have liked and we are gratified by the middle and high school levels where the bigger dollars are.

Is that a brand-new program?

No.

Then continuing on the education side, the seasonal loss took a big step up, you referenced this obviously in your comments. It is I guess somewhat surprising just in the context of this being a slower adoption year, I would have thought perhaps less pressure in terms of marketing expenses. Does that cause you to rethink maybe the profit expectations on a full-year basis?

No, I think it is going to be a challenging year, no question. We are very gratified by where Treasures is at this point. All signs look quite promising and of course that's going to be in the open territories. As we get a little further into this year, we will have an understanding of what the open territory results are looking like. But we have not seen anything materially different to change our expectations other than that we are little softer on the K-12 and science in Florida and we should do -- again, way too early to tell, but just from some of the districts that have already reported in California, we have good expectations there.

Okay, great. Last thing maybe for Bob. The 8.4 million shares repurchased from William McGraw, that is in the $18.4 million, correct?

That's in the $18.4 million, that's correct. But it was -- the actual cash outlay went in early April, so of the $994 million that I mentioned that we spent a portion of that expenditure actually occurred in the second quarter. That's why I mentioned that we moved to a commercial paper situation.

Okay, Got it. Thanks.

Lisa Monaco, Morgan Stanley.

Bob, could you just elaborate on the expectation for prepub costs in '06, why it looks like that number will come in lower than expected? And what can we think about that number for '07? Thanks.

Yes, with regard to the figure that I gave you, the early look that we had done which was really developed back in the fall of last year was $340 million and there were a number of programs for excellent opportunities in 2007 and beyond, 2006 but as well 2007, 2008. As we looked at it closer we saw opportunities to leverage certain capabilities across lines, but also as Terry mentioned earlier, we have been focused an awful lot about our sourcing, global sourcing, and there are opportunities to lower those costs through a global sourcing initiative. We have had this effort going on for a period of time. We have been doing global sourcing quite frankly but we have an opportunity to really step this up with a number of partners that we have developed relationships with outside of the U.S.

So as we continue to fine-tune the investment, that is why we reduced it from 340 to 315. In no way -- we're not cutting back on the number of programs but we just simply saw an opportunity to lower the cost and provide the same type of quality products but simply at a lower cost.

Can you give us any color on a preliminary basis '07 spend -- upper or about the same level?

It is really pretty early to be looking at that, but my first indication would be to say, probably that level or little bit lower but what we hope to do is as we continue to refine and enhance our global sourcing capabilities to bring that number in a bit lower.

Okay, just real quickly, is there any way to quantify the impact of the spillover effect from Texas spending in 1Q?

It was -- there was some spillover both from product that was some sales that actually came in in '06, as well as certain sales that wound up being deferred because we did not have the appropriate (indiscernible) order to go out with those particular sales. The amount was in the range of $10 million.

Okay, great. Thank you.

Karl Choi, Merrill Lynch.

A couple of questions. First one, just wanted to follow up to Peter's question. Do you expect your performance in el-hi this year to be in line with the industry performance? I will follow up with the second question.

Well, for the el-hi market, we are seeing -- after last year's 10.5% market rate that we anticipate with a 30% reduction in state adoption that somewhere around flat to negative 4. It is really hard to tell, but I think it is somewhere around there, and we will see. We have to get a better gauge on open territories and completion of soc studies in California, but we are encouraged with the overall science in part. So I think we should be all right.

Second question is related to residential mortgage backed. You mentioned that you expect it to cool off. Can you give us a little bit better sense as to how you expect the whole year to play out and what percentage of decline do you expect?

Just in terms of dollar volume, it is a big number. The residential mortgage backed market just from comparisons year-over-year, you keep thinking that this is going to slow down. The pipeline is full. I did not expect the level that we are at right now. We did expect commercial mortgage backed to pick up early last year and it did, and that is still quite strong. But I have to believe, Karl, that year-over-year comparisons are going to at least be in the single digit level by the end of the year, but it is still a quite strong market.

Last question, I think there was an upcoming vote on the elimination of a staggered board. How do you think that will play out?

Well, you've got our proxy and we put our position on that one. It was a proposal to eliminate and go to the annual election of our directors. We are not in favor of that, and we so stated and the reasons why in that proxy. We will see tomorrow.

Great, thank you.

Frederick Searby, JPMorgan.

Terry, a couple questions. One, can you give us some all-in in the quarter for S&P, how much was housing related of the revenues, rating revenues, RMBS, home equity loans? Then too, just clarification as you've moved away from stock options historically you looked a little high relative to the overall benchmark with the S&P in terms of percentage shares. How are you thinking of restricted stock? Are you going to try to and mold that to about 2% shares outstanding or is it more in line with the higher sort of 3%?

On the latter question, Fred, it is going to be lower than 2% on that one. On the first question was -- what was the first question?

Well trying to get a sense of how much of the entire revenues for S&P is tied into the housing market. We have RMBS, we have home equity loan, including commercial mortgage backed maybe or even stripping that out, but can you give us some sense --?

We don't break out those specifics, Fred, but the residential mortgage backed market to the last five years -- we all know the numbers there and they have been quite strong and they continue at that pace. What we will see is a shift in leadership in some of the categories. One of the things that we wanted to see and what would be very much in keeping is that commercial would pick up and that is the part that we wanted to see and we are seeing great leadership there.

But the residential mortgage backed is a big part of the structured finance market and as we start to see more increases on CDOs and some of that involvement as residential slows down, it will be picked up in other areas. So again, Fred, as you know the structured finance market the whole notion of securitizations nobody wants to hold onto paper. They are going to securitize it and sell it back into the market. This is a very favorite vehicle for banks and other financial institutions to do. So there is going to be no letup in the overall securitization market. What we will see is a shift in leadership between some of the subcategories.

Terry, but you in your annual report I think you -- or your piece on McGraw-Hill you forecasted 10% to 15% decline in RMBS and obviously no one has really a perfect outlook or forecast, but it is coming in much stronger yet you're not raising guidance overall for the year. Is guidance just getting increasingly conservative or is something coming off relative to expectations? Because clearly it is beaten so far, right?

Yes, it is really a question of timing, Fred. We're giving you the best thoughts that we have at the time and we want to be conservative about what we're saying and to deliver on it. But it looks to me at this point that given the strength that it may stay positive growth through the end of the year, but we would expect to see some year-over-year comparisons coming in.

Okay, thank you.

Brian Shipman, UBS.

There have been some amendments to the higher education act that have led to the Department of Education investigating the college publishing market. It looks like there are two issues. I'm wondering if you could comment on the two? One is the unbundling of textbooks and the second is again the investigation into college textbook pricing. I'm wondering if you could comment on those two issues? Thanks.

Yes. First of all we unbundle now. By the way I think as far as Margaret Spelling, the Secretary of Education and the leadership that they are showing with the expansion of No Child Left Behind it's only a matter of time before you get into higher education. They started pretty much on the early childhood and the elementary and they graduated into the secondary market and you are going to see more and more emphasis on higher education again in terms of overall American competitiveness and the types of skills and capabilities if the workforce development is in question.

And so I think this is very welcoming and what we have designed to do is to help in every way we can to get a student the right kind of skill sets and to be able to be proficient. And therefore, we think through a bundled approach there is more that we can do in supporting that student, in supporting the instructor as well in terms of being able to get there. Now if a college professor or if a community college wants to go in a different direction and wants components, we will go that way as well.

On the college textbook pricing issue, we have been very clear here and again if you're taking a look at a proposition that is trying to achieve a certain outcome, we are going to do everything we possibly can to bring value to that overall proposition and price it accordingly. Again if somebody wants it unbundles we can go in that component as well. I think one of the issues also is that this is a very exciting environment. When you talk about global higher education you're talking about some 90 million students worldwide and the global spend is about $300 billion on this one. The growth rate in that enrollment just given a lot of the economic growth activity and the requirements there is going to go to 300 million students, maybe more on that one. So the opportunity here is absolutely huge.

But when you're dealing with certain countries that literally cannot afford to do certain things, then we have to try and repackage and do things in a way that will be attractive to those markets. One of the reasons that we are very strong on the trade front is in the enforcement of intellectual property rights. You have to take a look at piracy rates when you get outside the United States. At a certain price point the pirates are going to copy those kind of materials and as countries begin to protect intellectual property better and to live up to those obligations, then obviously we're going to be able to value a proposition bundle more completely to help them in that sense.

So it is a huge opportunity and we welcome this in explaining how we go about doing things, but it is about outcomes and I think the Margaret Spelling has done a terrific job in bringing a spotlight to it.

Do you have any sense of timetable at this stage for the investigation?

I really don't. They haven't made it clear at this point, but we are available and we look forward to it.

Okay. Thank you, Terry.

Brandon Dobell, Credit Suisse.

Maybe, Terry, if you could address this issue of customizing or customization from two perspectives, one from the testing, but also from taking national programs and customizing those down to a state level. I guess I want to get a better idea of how big of an impact this has on the operating margins in education and do you see that sustaining for a quarter, for a year? At what point can you start to round the corner on that issue?

Then from a textbook perspective maybe talk a little bit about how the customization process might work. Are you customizing more programs for states? I know there was a move couple years ago some states wanted -- even small states wanted to have their own programs versus just kind of an off-the-shelf thing. And is there any correlation there between the pullback in free public spending and how you guys look at customizing national programs?

Terrific, thanks. Brandon, this is going to be a huge and this is going to be an essential business. It is now. If you go back 15, 20 years, educational testing was a nice to have kind of business. There was no mandates in terms of state testing or district testing and the like. It was pretty much left up to state educational commissioners to decide what they wanted to be able to do. Therefore where we excelled was on the high-end high-stakes summited type tests. What has taken place with the mandatory testing environment is the opening up of the low stakes testing, the formative side where teachers, principals, district leaders want to know right now how well we are doing, where we are going, where we need intervention, remedial, all those kind things such that when they get to high-stakes they are better prepared to be able to do it. So the educational testing opportunity is going to be big.

Now what has changed? Clearly when you get into formative and the low stakes, people want customized tests to their state standards and therefore it requires you to be able to have the capability to develop those kind of test in a short period of time. Remember, too, speed. Educators today do not want the educational results three months later or in a longer period in terms of some of the high-stakes. They want it yesterday. And so now the system that was designed in large part for the high-stakes summited type testing has to be retrofitted to a much more facile, customized where speed is a requirement. These additional new workflow tools are going to become very important in terms of being able to accomplish that.

So what we have done is a massive effort to reconfigure and to get ahead of the game. This is something that all educational test players are going to have to do. When you start seeing that there's problems here and there about testing, scoring problems or things like that, what you are seeing is the system going as fast as it possibly can with the existing legacy structure and therefore you have to quickly be able to retool to be able to work in that speedier customized environment. That is exactly what we're doing.

There is some investment in there for prepub for that in large part it's not a technology problem as it is a management issue in terms of being able to get around it. Most states are going to want you to in terms of scoring if you do some of that scoring and capability in their state so they can recoup some of the investments they're making in the mandatory testing. So we are broadening out our scoring capabilities but from a technology standpoint, we are going to be able to I think ramp up and be able to do very well in this space. This is a very important market.

Okay. It sounds like it is more of a near-term buildout perhaps of infrastructure, either people and/or technology in local markets to get there versus a structural margin difference between the tests. Over time shouldn't you be able to capture the same type of margins with these tests given that you probably charge more than you could for a basic off-the-shelf test?

Let's see, Brandon, probably lower on that. Bob, do you want to --?

I think just intuitively, Brandon, when you are producing a test as we used to with Terranova, CAT etc., that particular test, that same test could be sold nationally. You could leverage that development capability more broadly. So as you are working now in more of a customization mode on a state basis, the margins would naturally be a bit lower. I think the point that Terry has mentioned is we're doing an awful lot of work in looking at simply -- not just technology but looking at the process and putting in the appropriate workflow tools to be able to leverage as much as possible the development capabilities that we have to the extent possible where you can leverage some of the items or questions as that they referred to outside of a particular state. We're doing that as well.

So we're trying to do everything we can to speed the process, to leverage our workflow tools, to streamline the process as much as we can. But clearly when you are customizing, it is going to be naturally a bit of a lower margin than what would have been a very attractive situation where you are selling the same tests in literally 50 different states. But clearly as Terry pointed out, this is a very attractive marketplace.

Yes, and I think the other thing, Brandon, is that now that all 50 states have academic standards you are going to start to see a coalescing around the most important standards and you're going to see some commonality there and that will be very beneficial in being able to develop some of the formative testing.

Sure. Thanks a lot.

Michael Meltz, Bear Stearns.

Two quick questions for Bob. You mentioned there was a sale of the higher ed building there. What did that contribute in the quarter? Secondly, you have hit your annual guidance for buybacks. What is the current thinking on buybacks going forward? And then I have one follow-up.

Okay, first with regard to the sale of the Dubuque facility, which is a combination of an office and printing facility that we acquired when we purchased -- when we did our swap with Times -- we're going back quite a number of years ago, there was a gain on that sale. In addition there was a modest gain from a disposition in 2005. The net between the two was a benefit of about $0.005 on a year-to-year basis. So without necessarily saying what it was, there was a modest gain last year, a gain this year that was in that incremental benefit this year of about $0.005.

With regard to the share buyback, as I have stated we have reached our limit, but this is something that would be addressed and discussed by Terry with the Board at our meeting tomorrow.

Michael, that is a Board of Directors decision and we will be discussing that and I think the likelihood is that we will have a little bit more runway here.

Your $0.02 to $0.03 in guidance, that's already done is what you are saying?

Yes, the $0.02 to $0.03 guidance is done. We had plans in the original budget to accelerate and front load most of the share buyback. We completed a little bit earlier than we thought only by a couple of months, so we are still within the same $0.02 to $0.03 guidance.

Got it. One quick question on education. Terry, you had mentioned -- or your comment about the sort of dynamic in adoption, sort of a shift to year two. If tax receipts are running above schedule, understanding the variance isn't that big, but I'm just wondering what is causing that shift?

I think that it is again you've got -- it is all about accountability. You have got a lot of very anxious people wanting to make sure that their educational spend is delivering the results for them. And so I think that district by district you are seeing some wavering on some people's part to see how other people are doing with certain programs on that one. That's all. Some states just normally will only purchase three quarters of that adoption and hold it over for the remaining year. But at this point, it is really a question of timing and just based on what we are seeing at this point it's just a guess-ti-mate at this point that it might be a little bit lower in the first year and a little higher in the second year, but we will see on that one. As soon as we have some better information on that, we will give it to you.

Okay. And on S&P ratings, understanding you have pretty broad-based strength right now, is anything weaker than you had expected looking out over relative to a couple months ago? Is the outlook for any particular asset class?

No. Not really. We were talking about the public finance market. That is still off and again that is because in large part the states are in a much healthier situation. The other side is the plus side is on the corporates with corporates up about 22%. That is pretty good. We want to start to see a stronger number there. We have to see what the effect on interest rates -- most people have this -- one and done with May 10th and we will see. You still have commodity prices in general that are quite high and look like they may stay high and who knows what Fed Chairman Bernanke is going to consider on that part. But at this point the consensus is that that is pretty much done and therefore seeing strength on the corporate side is very encouraging.

Great, thank you.

John Janedis, Banc of America.

Just one quick one as a follow-up. The customization side and the margin pressure, does that at all, Terry or Bob, impact your longer-term segment goals of 20%?

No, at this point the 20% margin would include the improvements that we expect in the assessment and reporting area. Again what we're talking about now is not just the testing component. It is all capabilities here and one of the things that we did when we acquired Grow Network was to build out on the reporting capabilities such that once you get the results, then what is it that you need to do to be able to improve upon that situation? That part is something that we think is going to be an essential part of the overall equation. So no, it is part of the 20% and that is the goal.

Thank you.

David Ferguson, Lehman Brothers.

All my questions unanswered, thank you.

Mark Braley, Deutsche Bank.

Two questions. Apologies if these have already been asked but I got cut off a bit earlier. The first one is just the potential slippage in adoptions in California or in Florida, can you just quantify that in total so what would the worst case be there and is that enough to change your view on the overall el-hi market, the negative 4 to flat guidance for the market?

The second one was in the release. In the higher ed business you talk about the shift of the sales from traditional bookstores to online. I guess that has obvious working capital implications for your business, but can you just talk also about the implications for how the new versus used book markets develop if students are by default increasingly looking online for books? How concerned are you about that facilitating growth of the used book market?

First of all on adoptions in Florida in California again, it's too early to give projections on total capture rates here. We are very encouraged in Florida with science at the middle and high school levels. We are disappointed with some of our K-5 science program, but overall if you take a look at the K-12 space, we will do very well here. I think it's too early to say whether we would be number one in all of that, but at this point we are looking for a very strong show.

Yes, I was more thinking about where you were talking about the actual deferment of spend in the market from this year into 2007.

Again, it was timing in both cases. Traditionally California, as we said, and in some cases Florida they do not purchase 100% in the first year and it can be 75%, 80%, whatever. Based on what we are seeing from some of the districts at this point we are guessing that it might be lower than 75%. But it is all about timing and some districts are a little bit slower than others in all that, so we will have a better handle on that by the time we get into June on that part.

On the higher ed side and the used book market, no, we have suffered with that 30% used book market here in the United States and we are seeing it pick up in Europe on that part. Again in terms of going online and the transformation that that is going to take place, if you have got 90 million students in the higher ed in the world today going to 300 million and you've got 20,000 colleges and universities that are almost saturated, they are not going to be able to pick this up, so where's that coming from? My guess is that is coming from the private sector. We are betting on that in the four profit sectors and it is going to be online.

So you're going to see over the years a stronger transformation to an online environment and in that kind of environment you're going to be able to do things cheaper. You're going to be able to price differently and you're going to eliminate the used book market.

Okay, thank you.

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