標普全球 (SPGI) 2007 Q1 法說會逐字稿

Good morning and welcome to the The McGraw-Hill Companies first quarter 2007 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. (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 participants, McGraw-Hill has made the presenter slides available on the Internet. To do that go to http://www.mymeetings.com/nc/ join. I'll repeat the URL once more for those who would like to view the presenter slides on line. It is http://www.mymeetings.com/nc/join. You will be prompted to enter your name, the net conference meeting number is P as in Paul, G as in good, 6816259. The pass code is McGraw-Hill, all caps with a space between McGraw and Hill and the event type is conference.

This call is also being webcast live from McGraw-Hill Investor Relations web site and will be available for replay about two hours after this meeting ends both by phone and on the web for seven days. If you need assistance at any time including having your volume adjusted higher or lower, press star and zero and I will assist you momentarily. I will now the conference over to Donald Rubin, Senior Vice President of Investor Relations for the The McGraw-Hill Companies. Sir, you may begin.

Thank you and good morning. And thank you everyone from around the world for joining us today for the The McGraw-Hill Companies first-quarter 2007 earnings conference call. I am Donald Rubin, Senior Vice President for Investor Relations for the The McGraw-Hill Companies. With me 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 2007 results. We trust you have all had a chance to review the release. If you need a copy of it and financial schedules, they can be downloaded at www.McGraw-Hill.com/investor underscore relations. Once again that is www.McGraw-Hill.com/investor underscore relations.

Before we begin this morning, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the tele conference may contain forward-looking statements within the meaning of the Private Securities 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 also 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 for 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 the presentation, we will open the meeting to questions and answers. Now it is my pleasure to introduce the Chairman, President and CEO of the The McGraw-Hill Companies. Terry McGraw.

Okay. Thank you, Don. Good morning, everyone. And welcome to our review of the The McGraw-Hill Companies first-quarter results. Joining me today is Bob Bahash, Executive Vice President and Chief Financial Officer. And we will begin by discussing our results in the first quarter and the outlook for the rest of the year. Bob will then review our financial performance, and obviously, as always, we will go in any direction after that that anybody would like to go. Earlier this morning we announced our first-quarter results. We reported earnings per share of $0.40. That includes a $0.03 gain on the sale of a mutual fund data business in March. Revenue grew by 13.7% to $1.3 billion, and margin improvement in all three segments.

Historically, the first quarter is the smallest each year, but clearly we are off to a very good start, and to achieve our goal of producing double-digit earnings growth in 2007. As we look ahead, we see that inflation is under control at 2.5%. The U.S. gross domestic product is growing at 2.4%. And unemployment rate is holding at about 4.4%. All in all, a pretty good situation. David Weiss, the Chief Economist at Standard & Poor's was looking for probably a Fed rate going down probably by midyear. He now thinks it is closer to the end of the year, but that the next move still will be down. Again, David Weiss our Chief Economist believe the housing starts and sales are bottoming out after a 30% decline. Housing prices are down 3%. They will probably decline another 5% between now and the end of the year. Noncommercial construction is doing very well. State revenues are solid. Bond rates are stable. And the Federal Reserve has held the funds rate at 5.25% since last June. And no change is expected again soon. One cut to 5% again is possible by the end of the year.

Okay. With that as background, let's review our operating results and let's begin with McGraw-Hill Education. With that background, we expect education to be an important contributor to our performance in 2007. We are encouraged by the start this year, even in a seasonally slow quarter. Revenue increased 5.6%. The operating loss was reduced by 6.6%. Cost and expenses are under tight control and rose only about 2.7%. The Higher Education professional and International Group revenue grew by 11.5% to $186.9 million and contributed 56% of the segment's first-quarter revenue. School Education Group revenue was up 1.2% to $144.8 million. Let's take a closer look at those results. In the K-12 instructional market, the first quarter represents as we all know less than 10% of the full year. Sales in this period tend to consistent largely of residual or supplemental orders plus some early new adoptions which may arrive toward the end of March. The pattern was skewed in the first quarter last year because we booked $9 million in late orders from Texas for Music, Health, and some online programs and obviously this did not repeat in 2007. We closed most of the gap, a key driver was March orders from North Carolina for our K-5 Music program, and Vocational, Family and Consumer Science programs for grades 6 through 12. More important are the early indicators that our newly integrated school team is performing very effectively, and that the strength we expected in the state new adoption market is starting to materialize. These trends take on added importance this year because we have stepped up our participation in a growing state new adoption market.

In 2006, we participated in only 80% of the state new adoption market. This year, we have products for virtually the entire state new adoption market which we expect to grow 10 to 15% or between 750 and 800 million. As this chart shows, we believe the state new adoption market is poised for growth for the rest of the decade. It is much too soon to make predictions on our results this year. Sales campaigns are running at full throttle, but I can report that we are very pleased with the early feedback. Science in California and South Carolina, Math in Texas and New Mexico, and Music in North Carolina all look very promising at this time. We are also encouraged by the early showing of our Middle School products in the second year of the California Social Studies adoption. Solid opportunities are taking shape in some large urban markets, and that will include New York City, Boston, Milwaukee, and Washington D.C. We have already realized some substantial sales in Washington D.C. for K-5 Science and 6-12 Social Studies. We are optimistic about our opportunities in the open territories, we are competing with new products in K-5 Science, 6-12 Literature and the new additions of Everyday Mathematics and Open Core Reading.

We are pleased with the early showing of a new supplemental product called "Science Snapshots." Science poses its own special challenge to elementary school teachers who typically are trained as reading specialists. Today, these teachers must help students learn the concept and language of Science so they can score well on the new high stakes test as mandated by no child left behind. These Science tests start this academic year in elementary, middle and in high school, preparing students for those tests is not a simple matter. When you realize that the complex concepts like photosynthesis are introduced in the curriculum as early as the third grade. To provide a classroom solution, we combined video, DVDs and print to create a new program called "Science Snapshots" for use in the third, fourth, and fifth grades. The program includes 15 hours of video so students will have a familiar way to see and hear, as well as read about Science. And once again, we provide materials students can use to work independently on the computer. We believe that creating materials that address multiple learning styles of today's students is the route to success in the classroom and to the marketplace. In the testing market, we benefited from increases in custom work for statewide assessment programs in Georgia, Colorado, Indiana, and Florida. Sales of off-the-shelf test products were flat in the first quarter.

As I pointed out earlier, we had double-digit growth in the first quarter at the Higher Education, Professional and International Group and we are quite pleased. In the U.S. Higher Education, there is a phenomenon that we call "The Echo Effect" second semester ordering late in the year that echoes your success in the peak third quarter. When the second-semester business arrives, it is not entirely predictable. Some years it shows up in December. In other years it shows up in January. Our Higher Education Group heard the echo in January. We had a very strong January, and that contributed to the solid growth that we experienced with Higher Education products around the world in the first quarter. As you may know, we have three major imprints in this market, Science, Engineering and Mathematics, Business and Economics, and Humanities, Social Sciences, and Languages. All three produce solid gains in the first quarter. We are seeing increased demand for our digital homework manager products, particularly in World Languages, Accounting, Math, and Economics. Our new online courses are getting a favorable initial response in the market. Using technology to create new products and incremental revenue is a key strategy. We also are making real headway in the professional markets where we have launched a number of new online products. Last July, we introduced Harrison's Practice, which marked our entrance into the emerging patient care market. Harrison's Practice, combines content from the Harrison Editorial Team, experts in the field of internal medicine with an easy-to-use interface on a mobile platform, which makes it a true workflow tool for physicians in an ambulance, in an emergency room, or in a doctor's office.

Last week, we launched Access Pharmacy, an online product designed to keep pace with the changing demands of Pharmaceutical Education. This is a growing market. It is estimated that in five years, nearly 300,000 practicing Pharmacists will be needed to serve our aging population that's a 30% increase compared to 2002 and that statistic is from the Department of Labor. For Access Pharmacy, we are leveraging the content of some of our classic reference text, including "Goodman and Gillman, The Pharmacological Basis of Therapeutics." Access Pharmacy also offers a fully integrated drug database in English and Spanish and all web-based. Access Pharmacy joins Access Surgery and Access Emergency Medicine in our line-up of ready-access resources for medical professionals. More digital products for major medical specialties are on the drawing board.

Let's sum up on the outlook for education, in the L-High market, we expect 10 to 15% growth for the state new adoption market. We expect 3 to 4% growth in the open territory and industry growth of 5 to 7%. Based on our new products and greater market participation in 2007, we expect to outperform the industry. In the U.S. College and University market, we expect growth at about 4%, based on our plans, we also expect to outperform this market, and we expect margin expansion for the segment in 2007. One final point about the education market. The competitive landscape is changing. Some are exiting. Newer players are arriving. We have our plans in place to take advantage of growing global opportunities and the increased enrollments in the years ahead. It is clear us to that you can't sustain a knowledge economy without knowledge workers. And that's why education today more than ever before is a necessity for our world and a growing opportunity for our team of professionals who know this market so very well.

Okay. Let me leave with that. And let's turn to the Financial Services side. By virtually any measure, Financial Services had an exceptional first quarter. Revenue increased 21.5%. Operating profit was up 38.3%. And the operating margin expanded to 47.7%. Now that includes a 17.3 million pretax gain on the sale of the mutual fund data business in March. There were many contributors to this outstanding performance. Certainly world liquidity is extremely plentiful. We continue to operate in a very favorable interest rate environment, spreads remain tight, investor demand for fixed income instruments are strong. Our diversified portfolio fired on all cylinders. Both our domestic and International rating revenue grew at double-digit rates with International outpacing the U.S. performance. Corporate and government ratings were strong. Structured finance was robust, again, and globally.

Products and services such as bank loan ratings that are not tied to the public new issue market, grew substantially. Data and information products grew rapidly. Index services continued to expand. We expected double-digit growth on the top and bottom line this year in Financial Services, even though we forecasted a 10% to 15% decline in the issuance of the U.S. residential mortgage-backed securities. Clearly we have gotten off to a very strong start in 2007, and let me be clear, there will be more double-digit growth and margin expansion throughout the balance of the year in Financial Services, although probably not at the exceptional rate of growth that we enjoyed in the first quarter, but still very solid double-digit growth. Let's look at this situation in more detail. Corporate issuance in the United States set a record in the first quarter. It was up 43% to $336 billion. Both investment grade and high-yield markets were strong performers. Strong merger and acquisition activity and a favorable financing environment are making this possible. The demand for Corporate continues unabated this year. Insurance companies and pension funds have been consistent buyers, snapping up bonds as five-and-ten year maturities in their portfolios are coming to term. The high-yield market is benefiting from the reduction in the default rate, which has dipped below 2% for the first time since 1997. Innovation in derivative markets are also attracting a growing number of new high-yield investors such as (Inaudible) , to participate in this market. Corporate fundamentals remain sound, and we look for continued growth both here and abroad in this important market.

Public finance. Public finance benefited from a pickup in refundings and new money issuance. The environment is favorable. There is an expanding group of buyers and an increase in asset allocations to higher quality investment by aging baby boomers. We expect a good year in public finance although refunding volume is expected to moderate somewhat. Structured finance produced another strong quarter despite a 10.8% decline in the U.S. residential mortgage back security issuance. As I pointed out earlier, we anticipated a 10 to 15% decline in the U.S. residential mortgage back security issuance this year. A slowing housing sector, rising mortgage rates, lower housing price appreciation and fewer housing starts were factors in shaping our forecast. As part of its ongoing ratings and surveillance process for residential mortgage back securities. S&P carefully monitors trends in the housing and mortgage finance markets, consumer credit, and in the economy overall. Last Spring, a little over a year ago, S&P foresaw the trend in the quality of mortgage lending that led to the concerns that have arisen in the subprime market today. As a result of the deteriorating credit quality of certain subprime mortgage loans in 2006, S&P entranced the credit support necessary for a rating by 50% compared to transactions from 2005. While there is a lot going on in the sub-prime market, nothing has occurred so far this year to cause us to materially change our expectations on the level of issuance that we originally anticipated for 2007. It is also worth pointing out that the U.S. residential mortgage backed securities market has not come to a dead stop in 2007, not with a $254.1 billion in issuance in the first quarter. $254.1 billion in issuance in the first quarter. Prime and Alt A issuance increased 5.6%. Particularly offsetting the 24.4% decline in sub-prime issuance in the first quarter. In Europe, residential mortgage backed securities had a very strong quarter and the outlook is positive. Stable economic conditions combined with moderate home price growth in most European countries continue to fuel demand for mortgage credit. We also anticipate some residential mortgage backed securities activity in emerging markets including Russia and South Africa. And we start the second quarter with a very good pipeline.

In the Commercial mortgage backed security market, issuance was also strong. In the first quarter we saw steady improvement in Europe. Drivers of U.S. Commercial mortgage backed securities include strong Commercial real estate fundamentals, historically low interest rates, the refinancing of maturing deals, and rising property values. And the pipeline look very good. In the U.S. asset-backed securities market, credit card and student loan activity offset the slump in auto loan access-backed security issuance. Credit card and student loans should keep this market growing. Growth in the European asset-backed securities market was driven by small business loans, auto loans and leases, and equipment leases. The outlook in Europe is also solid. (Basel II) should have a positive influence on the market as consumer banks restructure the risk on their balance sheet to adjust to capital adequacy ratios. We saw robust growth in the U.S. and European collateralized debt obligation markets. In the United States, collateralized debt obligation issuance or CDOs was up 154% in the first quarter. Our expectation coming into this year was that growth -- the growth rate in CDO issuance, which slowed from the torrid pace that we saw in 2006.

While the first quarter was strong, we expect the growth rate to slow in subsequent quarters and that the assumption is already baked into our expectations. Key factors in the US-CDO market in the first quarter was concerns about widening spread, resulted from credit quality deterioration in the sub-prime market and increased in collateralized loan obligations resulting from the strength in the Corporate loan market. Although spreads did widen in the first quarter due to the sub-prime issuance, they have tightened a bit since the end of the quarter. There is a general agreement that spreads may not change or if they do, they could widen slightly during the remainder of the year. Our current estimates for the CDO market are based on such a scenario. S&P does not expect dramatic widening of spreads unless there is a shock of some sort to the system triggering some dramatic deterioration and that we don't have baked in.

US-CDOs will continue to benefit from strong investor demand and broader acceptance of structures such as collateralized debt obligations of Commercial real estate. There is a constant innovation taking place in the CDO space with respect to structures and the use of underlying collateral. This is not limited to the United States by any means, and we also see more growth in Europe. S&P produced significant gains in products and services that are not directly linked to the public debt issuance. These services which account for 26.3% of ratings revenue in the first quarter are another important measure of the diversity that we have created in the S&P portfolio. Bank loan ratings were a key driver of this growth. We anticipate more growth this year from bank loan rating, counter party credit rating, financial strength ratings, derivative and risk services. S&P also benefited from solid growth of its products and services for equity markets. The Capital IQ product continues to grow rapidly, and now it has more than 1900 clients. We have also increased the numbers of subscribers here and abroad for some of our other information product, ratings direct, ratings express and Compustat Express V. We continue to expand our index services. At the end of the first quarter, there were 113 exchange-traded funds linked to S&P indices, 85 in the United States and 28 outside the United States. Our S&P Citigroup indices formed the backbone of a new fast-growing business for benchmark indices, index data and custom indices. At the end of March, assets under management and exchange traded funds based on S&P indices increased 23.7% to 170.3 billion. We also benefited in the first quarter for the increased trading of derivative contracts based on S&P indices especially the E mini which is traded on the Chicago mercantile exchange. Average daily volume for E mini contracts in the first quarter was $1.376.979 million.

So summing up our Financial Services, more double-digit growth and margin expansion for the balance of the year, although probably not at the exceptional rate of growth produced in the first quarter. And let's now go over to the information and media segment. Revenue increased 4.1%. Operating profit was up 9.9 billion, up from 1.7 million for the period last year. The operating margin improved to 4.2%. An important factor was the transformation of Sweets last year from primarily a print Catalog to a bundled print and online service for the construction industry. Because of the change, Sweets revenue is now earned throughout the year. As a result of the change, Sweets contributed $6.5 million in revenue and $5.8 million in operating profit to this segment in the first quarter. Revenue for the business-to-business group grew by 7.5% in the first quarter to $212.3 million. This group includes some of our best-known brands, Business Week, J.D. Power and Associates, Platts, McGraw-Hill Construction and Aviation Week.

The Sweets transformation in Growth and Platts Realtime News Services for oil, natural gas and power markets were key contributors. AD pages in Business Week's Global Edition was off 3% in the first quarter. Broadcasting revenues fell 18.8% in the first quarter. For broadcasting, there were three major influences in the first quarter. Certainly the absence of political advertising. The loss of the Super Bowl. The decision not to renew Oprah Winfrey shows in two of our markets, and pacing for the second quarter is off about 14%. This segment is in transition. We pointed out that before that the Internet is reshaping the business-to-business market and we are working very hard to add value to our audience. We are making progress in the new digital world. I have already cited the transformation of Sweets in the construction market. In the energy market, trader are looking for better tools to help them work with realtime information. Earlier this month, we took an important new step to increase the efficiency and the transparency of physical oil markets.

Platt E- Window is a new online tool using leading-edge technology to significantly improve our service to traders who use our daily price assessments as benchmarks in the oil market. This is a solution with real promise. Benchmark prices are increasing the use as the basis for industry contracts. Financial Risk Management and for cash settlement of future contract, traded at commodity exchanges literally around the world. With globalization and technology making markets more dynamic than ever before, the need for reliable, transparent benchmarks and other critical news and analysis of such strategic commodities like oil and steel are helping to drive growth in our realtime subscription services. We are also expanding by licensing our intellectual property for use for broader financial and future markets. The most recent example is last week's announcement by the intercontinental exchange, ice, that it has selected -- it has selected one of our benchmarks, Platts (Dubai) price assessment as the basis for cash settlements on a new crude oil futures contract. Business Week.com continues to improve its performance with increases in advertising and unique visitors compared to last year, and we continue to make investments in this product. Building communities is an important aspect of our new digital world. That's why architectural record.com now makes it possible for architects to post their work on its web site. The site includes blogs and a rating system that encourages readers to participate by evaluating the projects that appear online and in the publication. Our objective is to make it easy for readers to share their work and to interact with their peers and with our editors. Not bad for a 116-year-old publication.

Okay, Summing up for the information in media, a soft start in advertising, particularly in broadcasting and nonpolitical year, growth in online services and margin expansion, and to complete for the Corporation overall, summing up, some very encouraging indications in education. A strong start in financial service. Progress and information in media. Margin expansion in all three segments. And our guidance for 2007, double-digit earnings growth in 2007. Okay. With that let me hold it there. Let me turn it over to Bob Bahash, our Chief Financial Officer and his

Thank you, Terry. We mentioned during our January conference call that we intended to purchase 15 million shares in 2007 under the share repurchase program that was approved by the Board of Directors in January of 2006. We elected to accelerate our program and purchase 13.2 million shares during the first quarter on a trade date basis at a total cost of $842 million. We expect to purchase the remaining 1.8 million shares during the balance of 2007. Now of the $842 million total amount, approximately $231 million was settled and funded at the beginning of the second quarter. There are now remaining 6.8 million shares that are available to be purchased under the 2006 buy-back program. Earlier this year, the Board provided additional flexibility by authorizing a new buy-back program of 45 million shares. Since 1996, the Corporation has returned $6.8 billion to shareholders through dividend payments and share buy-backs which includes approximately $915 million returned to shareholders in the first quarter of 2007. The diluted, weighted average shares outstanding, or WASO, for the first quarter of 2007 is 361.5 million shares that 's a 15.8 million share decrease compared to the first quarter of 2006, and a 2.7 million share decrease compared to the fourth quarter of 2006. The quarter only benefited modestly from the first-quarter buyback of 13.2 million shares since the bulk of the repurchases occurred near the end of the quarter. We have resumed borrowing in the Commercial paper market to fund our seasonal cash requirements and ended the first quarter in a net debt position of approximately $178 million. This compares to a net cash position of $351 million at year-end 2006. Now as of March 31, on a gross basis, our debt position is $607 million, which is offset by about $430 million in cash, primarily in foreign holdings. We expect to return to a net surplus cash position by the end of the year. Interest expense was 1.2 million for the first quarter. Last year, we were essentially debt-free in the first quarter and had net interest income of $2.5 million. Interest expense for the second quarter will increase, since it will reflect Commercial paper borrowings for the full quarter.

For 2007, we now expect the full-year interest expense to range between 24 and 26 million. This is higher than our previous estimate due to the timing of funding costs related to the accelerated share repurchases, as well as additional interest expense resulting from the implementation of Fin 48. Fin 48 or FASB interpretation number 48 which is accounting for uncertainty in income taxes became effective for the Company on January 1, 2007. GAAP-based financial statements must account for taxes, including an analysis of all tax positions. Fin 48 clarifies the accounting treatment of uncertain tax positions taken or expected to be taken on income tax returns. Fin 48 also clarifies the rules regarding accruing interest on uncertain tax positions. We will continue to accrue interest within the interest expense category. Last year as Terry mentioned, we transformed Sweets, McGraw-Hill Construction Group popular building products data base from a primarily print catalog to a bundle print and online service. The associated accounting change benefited year-over-year comparisons for information and media. For the first quarter 2007, the results reflect $6.5 million of revenue and $5.8 million of operating profit resulting from the Sweets transformation.

Let's now look at our corporate expenses. Corporate expenses decreased $5.6 million or 13.8% in the first quarter compared to a year ago. But there were several one-time factors that influenced this decline. Last year's first quarter Corporate expenses included a $14 .8 million charge relating to the elimination of the restoration stock option program. The year-over-year comparisons are also impacted by a $4.6 million gain on the sale of Debuke, Iowa office and printing facility that also occurred in the first quarter of 2006. That categories within Corporate expense that increased are the following, expenses associated with the new business process management program that was implemented this year, designed to strengthen our core processes and assure alignment with customers' needs while improving operational efficiency. Increase in vacant space from downsizing and business rationalization initiatives that were implemented in 2006 and higher incentive compensation. The effective tax rate in the first quarter was 37.7%. The 50 basis-point increase from the prior year is driven by the change to the accounting for uncertain tax positions Fin 48, the gain in connection with the sale of the Company's mutual fund data business, and a state tax audit settlement. Based on these factors the operating effective tax rate for the balance of the year is projected to be 37.5%.

Now let's take a look at capital expenditures, which include prepublication investments and purchases of property and equipment. In the first quarter the our prepublication investments were $57 million compared to about $61 million for the same period last year. For 2007, our prepublication investments will now be about $310 million. We anticipate a reduction in spending from our original projection of approximately $330 million through efficiencies, technology, global sourcing and simply firming up our forecast for the year. Purchases of property and equipment were $23 million in the first quarter compared to $12 million for the same period last year. This increase is due to the construction of our new data center which has now begun, along with technology investments we are making to digitize our products and services. We continue to project $250 million for 2007. Now for noncash items. Amortization of prepublication cost was $28 million in the first quarter compared to about $23 million for the same period last year. We ramped up our publishing schedule last year in anticipation of the strong L-High new state adoptions in 2007, 2008 and 2009. We continue to expect $260 million in amortization of prepublication cost in 2007. Depreciation was $29 million in the first quarter compared to about $28 million for the same period last year. We still expect it to be $130 million in 2007, reflecting the higher levels of capital expenditures in 2007 and a full year of depreciation from capital expenditures made in 2006.

Finally, amortization of intangibles was about $12 million in the first quarter which is about the same amount as compared to last year. For 2007, we continue to expect $50 million. Thank you and now back to Terry.

Okay. Thanks, Bob. And let me go to you, Don.

Thank you. Just a couple of instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask your question. To cancel or withdraw your question, simply press star two. If you have been listening through a speaker phone but would now like to ask a question we ask that you lift your handset prior to pressing star one and remain on the handset until your questions been answered, that will insure could sound quality for all. We are now ready to take the first question.

(OPERATOR INSTRUCTIONS) Thank you. This question comes from Peter Appert of Goldman Sachs. You may ask your question.

Thank you. Good morning. Terry, you cited the second quarter starting with the good pipeline at S&P in terms of new issue and volume. Can you give any color on that in terms of category strength, or geographic strength you are seeing?

Yes. Again, it's very appealing, Peter, because it is across the board. We talked about the Corporate and the government side, and it's strong here. Mainly because of the M&A activity, but also in Europe and Japan as well. So, you know, that part is doing well. The structure finance market is -- is doing exceptionally well. The only piece within that is off the U.S. residential mortgage-backed market. The European residential-backed market, as we said, is actually doing pretty well. And that market in the United States is on, we project it to be off 10 to 15%. And it was off 10.8% there. But everywhere else, the Commercial mortgage-backed market continues very, very strong. It has been strong since early 2005 and continues. You are seeing it in the collateralized debt obligation market and you are seeing it in the nontraditional areas as well, especially in terms of the bank loan ratings area. So, it is a, again, a very, very strong pipeline, and we are very pleased with the start.

Okay. Great, thanks, Terry. One unrelated question. I was impressed you were able to post a first-quarter decline in the seasonal (inaudible) on the education business despite the adoption. Might we read into that that you are spending less than marketing and promotion than you otherwise would have anticipated this year? Or is it all a function of the upside coming from the secondary school -- or the college business?

Yes, well -- you got both. I mean there is a timing issue. Certainly, coordinating those expenses, but also, as you rightly say, the Higher Education market was very strong. As you may recall, Peter, we had a little softeness in the fourth quarter, last year in terms of unit sales. And we think that there was some timing issues associated with that. And we were really glad to see the pickup, especially in January. We were talking about that echo effect. And because we thought that it should have been a little bit stronger in the fourth quarter last year. And there really was a timing issue in January. But it's strong. And the professional market is also doing very well, and in particular, I am very pleased with the innovation part, but as you correctly say, this is, 2007 is a very important year for the education market, 2008, 2009 and 2010 is too, but this is the first year of a multiyear period. And the -- with the adoption schedule so strong, and all that, we really want to really be able to do a good job here.

Last thing, Terry, you noted the ownership changes for. So competitors in the market. Do you see some indication in the market that maybe some of these other players are less aggressive from a marketing and promotion spending as a function of these changes?

Well I think they are probably all -- and I wouldn't want to speak for some of them, but they are probably all different reasons, but one the things that we have talked about, and when we are talking about major market transformation in the educational instructional materials business, you need to see -- you need to see some turmoil. You need to see some people deciding not to want to make investments in play and others that want to get in. So I think what they are are all very, very good signals that says that the market transformation that we have been talking about is well under way.

Thanks, Terry.

Thanks.

The next question is from Lisa Monaco from Morgan Stanley. You may ask your question.

Terry can you comment a little bit -- a bit of a follow-up to Peter's question, just on the debt issuance in the first quarter. How much of that was related to potential deals being pulled into March from future periods? And then if you could just talk to the strength in the CDO market and what is driving that. And if you can quantify what percent of the CDOs that you rate are related -- are tied to RMBS in the subprime market and given the slow down in RMBS (Inaudible) how is the growth in CDO issuance (Insudible). Thanks.

Thanks, Lisa. Bob, did you can get that last one. Between us we will get these. A lot of questions there. There always is timing issues, Lisa. The pipeline has been strong in '05, '06, and again, the folks work very hard to get it all completed, but there are carry-over and timing issues on that one, but, again, it is just very, very strong. At this point, there is no let up on that. The CDOs are very attractive because it is the instrument of choice of so meanings financial institutions because of all of the variability that CDOs have in terms of being able to break up into various attributes and risk reward capabilities and the like, and it just gives portfolio managers more flexibility to do more things in terms of the construction of those portfolios.

So the CDO strength that we are seeing now is a continuation of the attractiveness of those investment. With residential mortgage back, the U.S. market was down 10.8%. And -- and again, the sub-prime market was down 24.4 on that part. Now, the thing on the sub-prime, it has gotten, in my opinion, an awful lot of spotlight in the general press as-- and I don't think it is as warranted or deserved. I don't want to understate it. But, when you are talking about an economy that's in its sixth year of expansion, the Fed Reserve worked hard to bring down the growth rate with the 17 rate hikes from last year, the housing sector has been most affected. And, therefore, with the rise in those rates, we have seen some defaults on the sub-prime side. Yes, there were some lenders that were way too aggressive. And that's why over a year ago, S&P changed some of the lost coverage criteria for those lenders. And put those into effect such that it reflected the fact that some of these lenders were too aggressive. Of the outstanding mortgage loan volume, sub-prime is about 13%, of that market. And, yes, I think the housing market slump has bottomed on that in terms of sales and new starts, but we will see throughout the year certain defaults on some of the sub-prime loans, but it won't have a material impact in our opinion on our results. So we just think that these are in the housing sector, these excesses we all know get into the markets, and we see that those that are least able to aford certain things, you are going to see some defaults on that. Bob, do you want to add anything?

Yes, Lisa, the growth in the CDO area continues in our case to be driven by some of the new structures of the hybrids, the arbitrage opportunities within the class flow and synthetic factors. And clearly sub-prime issuance is part of some of the CDO packages, but as Terry pointed out it's a small piece relative to the total issuance volume.

Okay. Just quickly on L-High. Terry, can you just give us some -- I guess anecdotal evidence on why you feel comfortable with the 10% to 15% growth in the new adoption markets you cited. Early indication from some of the large states. What specifically are those early indicators? Thanks.

Again, we went through -- I gave you some of the heads-up in some of the areas, New York, Washington D.C., Milwaukee, and so forth, but, again, it is a very full calendar. The state new adoption market will be up in the 10% to 15% range and you have got some major disciplines in major states. You got K-12 Science in California. You have K-12 Health, World Languages in Florida. You have K-8 Math in Georgia. Indiana you have grades 1 through 8, Reading and Literature. Texas, grade 6 through 12, Math. Tennessee is doing a K-5, Reading. You have got a broad representation in that market, and that coupled with a growing open territories market, is pretty attractive. Now it is too early to start making calls on capture rates. We will probably get into that toward the end of May and into June on that, but the early indications as some of these sales campaigns are telling us that the product is right, and it is getting very strong receptivity, and so we are encouraged, but that is the right word, Lisa "encouraged." And, again, it is an important year for us. And we really want to be able to post some very good results.

Great, thank you.

The next question is from Michael Meltz from Bear Stearns. You may ask your question.

Great, thank you. I think I have three questions on S&P. Terry, I think -- there was a slide where you talked about the outlook specifically for the CDO area and you mentioned growth should decelerate or might decelerate. Can you talk a little bit though, are you still expecting revenue growth from the CDO business throughout the rest of the year? I know it is a broad -- a general question, but I think it is important. And then, Bob, are you -- on the margin side, can you just talk a little bit about S&P and the accruals. Was there anything -- did you normalize anything this quarter or anything we should be aware of on the margin side? Last question, of the 21% revenue growth of the quarter, ratings versus nonratings, which grew faster? Thank you.

Okay. Michael, on the collateralized debt obligation market. Again, this has been a very strong market and multiyear and has been growing as the acceptance of CDOs and variability of CDO usage is taken -- taken hold of the marketplace. The CDO market was up 154% in Q1. And -- and that's coming off a pretty good base. So, I mean, that is pretty stunning growth. Now I just don't think that we can expect 154% growth in each quarter going forward on that one. So we are just saying that we think there is a slower growth rate in subsequent quarters, but it is going to grow on that one. And we see nothing to hold that back. Bob?

Yes. Just to expand upon that point. Our second-quarter estimate at this point in time based on external data calls for significant growth in the U.S. in the CDO area in terms of par value, up over 60%. That's in the U.S. and in Europe we are forecasting close to 23% growth in the CDO marketplace. That is the second quarter. So very, very strong. On your question with regard to margins and accruals. We are very high in there. What you are seeing is what you are getting. There is a very strong quarter. The margin improvement clearly driven by the higher revenue elements, as well as the containment of costs.

Okay. And on that growth rate, ratings versus nonratings?

We don't -- as you know, we do not break those components out, but as Terry pointed out earlier we saw strong growth across the board in our ratings area, the traditional area, the nontraditional ratings, data and information, index services. As you know we don't break it out, but clearly we had very strong performance across the board.

Okay. Bob on your point on the forward look, do you have a feel as we stand here right now on the second half? Do you guys accumulate a forecast for that?

Well, as we are looking at the full year -- I have full-year data in front of me now. Again based on external information. CDO growth in the U.S. forecasts to be about 30% in Europe, about 28%. Very clearly through the balance of the year. As Terry pointed out we expect to grow Financial Services double-digit top and bottom line for the balance of the year.

Sorry. One last clarification though. If -- maybe it's a seasonality issue, but if you are saying plus 125 in the first quarter and plus 60 in the second, but plus 0 for the year. Wouldn't that imply down in the second half?

Yes, what we are -- I think the key to focus on here -- this is a very broad portfolio and you are focusing on one particular element within the portfolio. We see significant growth in other sectors, whether it be CMBS, whether it be in Corporates, again data and information which has been growing very strong. So we feel very, very comfortable about our forecast for the full year. As we have pointed out earlier, and as you well know, we have forecast a decline in the RMBS marketplace in 2007. And we continue to hold to that. So that is within that structure and area. We do expect to decline. We expect it to decline in the second half of the year. No question about it. Nevertheless, we feel very comfortable for our forecast for the balance of the year.

I will also say, Michael, when you are talking about year-over-year, the decline of 10% to 15% that we are projecting for U.S. residential mortgage-backed market is still a sizable market. And the year-over-year comparisons obviously just get a little bit difficult.

Okay. Thank you for your time.

The next question is from Karl Choi from Merrill Lynch. You may ask your question.

Hi, good morning. A quick question. I wonder if I heard it correctly, Terry, you are expecting the L-High industry growth to be 5 to 7% for the year which is higher than previously. I wonderd what drove the change there and I have a follow-up.

Again as we go, we willl give you our best thinking. I know -- on that one. We see it grow -- the market growing at 5 to 7%. And we see ourselves outperforming the market.

Okay. And similar question for college given a strong start in January or in the first quarter overall and the seasonality of the business, 4% growth for the industry seems conservative given the fact that it seemed like it was double-digit in the first quarter.

Well, again, in terms of some of the timing-related issues. There was -- again I go back to the question that in the fourth quarter, you know, college sales, higher ED sales were -- just a little bit lower than we thought they were going to come in at. And, you know, we were trying to put that into context on that one. And the echo effect that we talked about happened in January rather than December. So I think the first-quarter numbers benefited from, you know, some of the -- you know follow-through coming out of the -- out of the December. But it's, again -- you know, maybe you are right. Maybe it is conservative, but I think right now the best information we have on the market is 4%. And given what we are seeing at this point and -- and how well the products are doing, we -- we think we are going the products are doing, we -- we think we are going to beat that.

And, Bob, I don't know if you have this, but do you have the deferred revenues at the end of the year quarter, and if -- if the growth rate year-over-year, if you have that, that would be great as well.

Okay. Let me just look for that. I do have it. I will have it in just a moment.

I guess lastly, Terry, you have the 20% operating margin growth for education. Any update on sort of what kind of progress you can make in terms of contributing the margins for the whole year given the results in the first quarter?

Well, you know -- and, again, you know all the components that we are looking at, you know, in terms of that goal. And there was global transformation project and the resource management project, and the market itself on this one. So -- that's our goal, and this is an important year. And so let''s see how this year starts to unfold. And then we can tighten it up for you. But that's the goal.

With regard to the unearned revenue, deferred revenue you asked me about. At the end of the quarter it is about $978 million. That's an increase of almost 13%. And in the -- I should just point out in the base -- the base year, last year, it would have included an element from the divested funds business, so the growth rate would be higher because, of course, we don't have that in this year. So this is -- almost 13% with funds in the base year so something higher than that. Nice performance.

Great, thank you.

Thanks, Karl

The next question is from Drew Crum from Stifel Nicolaus.

Great, good morning, everyone. I wonder if you can share with us any update on the regulatory front for the credit rating business?

Yes. And, Bob, make sure I have got these dates right. At this point, we are -- we have gone back and forth with the SEC. They are in the final -- final stages now of developing their final positions. I believe those have to be completed by May 23 on that one. I'll get that date exactly for you, but, I think they have to be completed by May 23 for implementation in June. On that part. From our standpoint, there has been fairly -- it has been a fairly good outcome. You know we have gotten the things that we want. There still is some discussion on a couple of issues that are going on, but the SEC is on schedule and so far we are very comfortable with the way it is working. Let me see --

June 26.

Okay. June 26 is the deadline, and I think May 23 was the deadline for them to complete their work. But they have to be implemented by June 26 on that one. And we don't see any and, again, all along we are working very carefully with them. And we don't see anything that materially would affect us.

Okay. Question for you on the L-High business. You talked about last quarter cutting some less-than-profitable testing contracts. And based on the due diligence we have done, you guys appear to be maintaining share and picking up some nice contracts along the way. I was wondering if you could comment directionally the profitability for this business. You talked about margin erosion, the last several consecutive quarters. At what point do you reverse that trend and get the margin going in the right direction?

Okay. We are sitting on some very big contracts that will be coming due in the second quarter. And we are waiting for the outcome of some of those, and we are very hopeful on that one. But let me put it into the broader context again. Again, you have two types of tests. You have the summit of test, the high-steaks test and the formative tests which are the low-stakes test, the growth in the market is in the formative side. In the past, our strength has always been on the very large high-stakes test. The management system, the information management systems designed to create those tests are the different than the one to do the formative. The formative low-stakes for teachers, for principal, administrators, whatever, you need to have speed and customization to what they are trying to measure and those two require different information management systems and as we were saying, that is where the investment is going, in creating the capabilities such that we can compete very quickly in those markets. The brand that we are using on the formative side is Acuity and Acuity is up, again, on some big contracts and we should hear fairly soon on a number them and that would be a second-quarter issue. The investment and a lot of it is P&L investment is still on going in terms of building the kind of systems to do that.

Thanks for the color, Terry. One question, Bob, any updated guidance for free cash flow for the year?

No we haven't made any adjustments. We are in the range of 750 to 775. We are holding to that at this point in time, the share repurchase activity was a timing issue in terms of the acceleration earlier in the year versus what we would have done over the balance of the year but no impact over the 750 to 775.

Thanks, guys.

The next question is from Fred Searby of J.P. Morgan. You may ask your question.

Thanks, guys. Great quarter. Question for you Terry just to drill down a little bit on the margin expansion you saw at Standard & Poor's. Clearly that was extremely positive, and how much is (Inaudible) cost dilution. Bob, you mention some of it was fixed cost dilution. Some of it was changes. Are we seeing as you ramp up in some of the nonratings businesses particularly Capital IQ, is that actually having a meaningful impact on margins as you kind of gain scale and secondly, I mean, what should be the progress there throughout the year. It sounds like you are expecting some ongoing strength in margins at Standard and Poors. Thank you.

Yes. Thanks, Brad. Let me take the first whack and follow up, Bob. Yes, you are going to get margin expansion at Financial Services in 2007. You are not going to get a lot of contribution in margin from investments like Capital IQ. Capital IQ, we are really driving hard in terms of customer penetration and market acceptance and, therefore, they are in a full investment mode. We are very excited about the prospects for Capital IQ. And the progress they are making. But, again, in terms of an overarching strength. The margin expansion is coming from a higher level of efficiency and -- and the robust growth. And we expect for 2007 -- and quite frankly in terms of our own plans going forward to continue to see margin expansion at S&P. So I think the guidance I would give as that -- we are definitely going to do better than 2006, and let's -- let's see how the year starts to unfold where we are. The 47.7 for the first quarter includes that 17.3 million gain on that mutual fund I think. But still it is showing good growth, and we expect, as Bob said to show double-digit top and bottom and margin expansion in the remainder of the year. Bob, do you want to add anything?

Fred, yes, the margin improvements came really across the board with regard to our various products and services, whether it is in ratings data and information portfolio services. And performance evaluation side. So we are seeing very, very good performance across the board with very prudent expense management. As Terry pointed out. We are allocating resources. We are allocating our expenditures to those particular growth areas where we have an opportunity to significantly expand, and at the same time look prudently at managing costs in other areas. Very solid performance on the revenue side, and very prudent management on the cost side.

One of the -- one of the areas, Fred, that we institutionalized throughout the Corporation last year, and it was a consolidated business process management function. There is a business process operation in each of the segments and Corporate, and they are all coordinated, but they all have a number of projects that they are working on. And, therefore, when we start talking about efficiency and process improvement, we expect to see more and more based on those kind of initiatives.

Just an one follow-up. You have made, what looks like a very (Inaudible) call in buying CRISIL and some of these other agencies around the world and I wonder how margins are impacting the overall business at some of these smaller but albeit fairly exciting agents -- rating agencies around the world. How we should think about that as they continue to grow and so the some point start growing faster of course than your domestic business.

Again, Fred, the International growth rates are -- are higher. And that's why you are seeing more and more participation coming from outside the United States. Building that global network is extremely important. They are all in varying degrees of development however. CRISIL is a much larger operation that has been added for a while. We have had a relationship with them since 1996, and it is very strong and doing extremely well. And that's also because of the Indian market that is doing so much better. When we start talking about some of the smaller -- you got -- the revenue base up to be able to get the same level of participation, and, therefore, there are varying degrees of development, and they would have different margin levels, but they will have comparable margins -- all will have comparable margins to the U.S. as they gain size and critical mass. But, again, the growth outside the United States is much faster.

All right, thanks.

We will now take our final question from Brandon Dobell of Credit Suisse. You may ask your question.

Thanks. I am going to beat the -- the dead horse one more time with this. If I can frame in CDO growth expectation question a different way. If Q1 was up 150% and Q2 expectation are up 60 and Q1 came in well above what everybody was expecting it to. The two-part question would be wouldn't that necessitate either a change to the year estimate if it started out so strong, wouldn't that 30% now be higher or have to be higher or does it , if an '06, the first half of the year roughly 40% of the volume would your projection for Q1 and Q2, seems like the math would have to work out that the back half of the year would have to be roughly flat or down a little bit for that 30% number to be the right number. Just trying to -- trying to put all of those things together to understand -- if the forecast is too low and probably materially too low, if we see continued strength or if -- if the implication is that that 30% is the right number, there should be an offset to the strength that we saw the first -- the first quarter out of the box.

Bob has got some specific numbers for you, Brandon. But, remember, the 154% now is a Q1 over Q1, and growth rate, and the other numbers that Bob was giving you are the same. The market is strong, and we will be strong and we are going to be participating right along with it. Bob, do you want to give the specific number on that.

Yes, the -- when you did -- when you go through and do that math and the 30% which I indicated was the full year, the second half of the year would work out to be be roughly flat as compared to the second half of the previous year, but again as I point out, imbedded within that forecast were elements of the RMBS issuance and such that we had forecast tob down on a year-to-year basis by roughly 15%, of which we expected to see that pretty much across the board and if not possibly accelerating in the second half of the year. So that clearly is an influencing factor, but, again, that is one part of the market. The CMBS area is growing significantly. We expect Corporates to do very well. The nontraditional markets, bank loan ratings and such to do very well, and we continue to be very, very bullish about our nonratings products and services, that being data and information portfolio services, et cetera. So we are -- as well as high yield by the way. High yield is expected to do very well through the balance of the year. So, again there are is a portfolio look, we looked at portfolio, issuance, revenue streams and such. That's how we came with our through the balance of the year double-digit top and bottom line.

Okay. I appreciate the clarification. That's very helpful. You guys certainly have a more diverse portfolio than I think people realize sometimes. In the education space, as you forward over the '07, '08, '09 timeframe, you gave some color of what percentage of adoption market you expect to compete in this year. Shall we anticipate that the '08-'09 time frame that you also go after that much of the adoption market or is it materially different in those two years that your product portfolio fits better this year that it might in '09, lets say?

That is certainly the game plan, Brandon. When you talk about '08 and we are in '08 product now. '08 and '09 you still got very very big states and very big disciplines. This year you have got California K-12 science in '08 California K-12 math and then in '09 you are going to have California K-12 reading and literature. Those are big. Florida you not only from the health and world languages for this year, in '08 you have K-12 reading and reading intervention which will be big and in '09, you are going to have 6-12 literature in Florida and so forth. So, the plan with those kind of major adoptions and especially with the reading, the math, and the science, you can count that we are going to be looking to participate in all of those.

Okay, great, thanks a lot.

Thanks.

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