標普全球 (SPGI) 2008 Q2 法說會逐字稿

Good morning and welcome to McGraw-Hill Companies second-quarter 2008 earnings call. (OPERATOR INSTRUCTIONS)

To enhance the call for today's participants McGraw-Hill has made the investors slides available on the Internet, go to http://mymeetings.com/NC/join. I will repeat the URL for those who would like to present the presenters' slides on line, 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), 2654459. The password is MCGRAW HILL, in all caps with a space between McGraw and Hill and the event type is conference. This slide presentation uses Microsoft live meeting. After you log in please note the entry page. If you were using an old version of Live Meeting, you will be told to upgrade to the newer software if you wish to see the slides. (OPERATOR INSTRUCTIONS) This call is also being webcast from McGraw-Hill Investor Relations web site and will be available for replay beginning about two hours after this meeting ends, both by phone and on the web.

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. Good morning to our worldwide audience. Thank you for joining us for the McGraw-Hill Companies second-quarter earnings call. I am Donald Rubin, Senior Vice President, Investor Relations at the McGraw-Hill Companies. With me today is Harold McGraw III, Chairman, President and CEO, and Robert Bahash, Executive Vice President and Chief Financial Officer.

This morning, the Company issued a new release second quarter results for 2008. We trust you've all had a chance 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. Once again, that is www.McGraw-hill.com/investor_relations.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meanings of the Private Securities and 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 Securities and Exchange Commission. We are aware that we do have 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. Do that subsequent to our call.

Today's update will last approximately an hour. After our presentations, we will open the meetings to questions and answers. My pleasure to introduce the Chairman, President and CEO of the McGraw-Hill Companies, Harold McGraw.

Thank you very much, Don. Good morning, everybody, and, again, welcome to our review of the McGraw-Hill Companies second-quarter and the outlook for the rest of 2008. Again, Bob Bahash, our Executive Vice President and Chief Financial Officer is joining me today on this call and I will begin by reviewing the second-quarter results and our prospects and Bob will review our financial performance and obviously we will be pleased to take any comments or questions that you might have.

Earlier this morning as Don said, we announced second-quarter results. Earnings per share were $0.66, and that included a pretax restructuring charge of $23.7 million or $.05 per diluted share, primarily for the severance cost relating to a workforce reduction of 395 positions. Revenue for the second quarter declined by 2.6%. The biggest national housing recession since the Great Depression and the credit crunch in the financial markets obviously continue to have an effect on our result.

David Weiss, who is our S&P Chief Economist doesn't expect the housing prices to bottom out until the first half of 2009. The large supply of unsold existing homes continues to weigh on the market. David expects housing sales and starts to bottom out some time in the third quarter of 2008, but prices will also probably have about another 10% to go, and, again, we are looking for somewhere in the latter part of the second-quarter 2009. The Federal Reserve is not expected to take any action on interest rates at its August 5 meeting. In fact the next move expected from the Fed will be a rate hike probably in the second quarter of next year. David Weiss estimates gross domestic product, GDP growth, of 1.7% in the second quarter and 1.8% in the third quarter as consumers spend the rebate checks. So a lot of activity moving forward into the second and third quarter, and, therefore, he expects negative growth in the fourth quarter of this year and in the first quarter of 2009, followed by 3% growth in the second quarter next year.

In this environment, states are dealing with falling tax receipts and challenging budget, but that has raised questions about the outlook for education budgets, and, of course, in the new fiscal year that started July 1, and we have 46 states that starts their new budgets July 1 and the state is working hard to protect educational funding. A new survey of state education budgets by McGraw-Hill Education has pinpointed education information on K-12 education budgets in 38 states, and we have learned that most of these states' education budget sin creasing the new fiscal year, although at a slower rate than last year. But, this increase the new fiscal year although at a lower rate. Ranging 3.5% for the new fiscal year versus 10% last year. We have seen at this point reductions in K-12 education budgets in only three states, two of them are flat. There is another factor in considering state budgets and that's bond issuance. In the face of declining tax revenues, states are more likely to step up bond issuance in the new fiscal year and that is a plus for Standard & Poor's.

With that as background, let's return to the review of the operations and let's begin with McGraw-Hill Education. A very good start in what is expected to be a robust state new adoption market this year was a key factor in McGraw-Hill Education second-quarter performance. For the second quarter, revenue increased 3.6%. Operating profits, including a pretax restructuring charge of $8.5 million declined by $10.9 million or 13.5%. The operating margin was 10.4% versus 12.4% last year. The restructuring charge reduced the operating margin by 126 basis points. McGraw-Hill School Education Group increased revenue by 6.9% at $438.2 million. And the McGraw-Hill Higher Education Professional and International Group saw a revenue decline of 2.1%.

With the decision making largely completed in the adoption stage, we have a pretty good idea that the point of our prospects there. As in 2007, we captured 32% of the state's new adoption market and that was worth about $820 million. In 2008, we expect to capture about a third of an even larger state new adoption market. We estimate this year's market will come in between $900 million and $950 million. The biggest opportunities this year are in reading and math. The key adoption states are Florida, Texas, and California. We expect to produce solid results in both key disciplines and all of our key adoption states.

In the second quarter, we saw the first signs of our successful campaigns as orders came in for reading from Florida and math from Texas. An exceptional year has taken shape in Florida. We are very pleased here. Treasures, our program which has been widely adopted. But that is not the whole story. We compete obviously with a spectrum of products because US education is not a one size fits all market. So we will take additional market share in Florida with our alternative basals and those are Imagine It and Reading Mastery Plus. As a result, our products will account for more than half of this year's Florida K-5 reading market.

We also did very well in Texas with our new state specific balance basal math program and in California we expect to build on last year's success in science with an excellent performance in the sizable second-year K-8 adoption. We also anticipate good results there in the K-8 math with our new state specific balance basal and with Everyday Mathematics.

In the overall K-12 reading and literature, state new adoption markets, we expect solid results in Alabama, Indiana, Louisiana, and Oklahoma, Spotlight on Music is leading the elementary market, and our fine arts, health, business and vocational lines are performing well in states adopting these categories. Supplemental market remains sluggish, although we are enjoying some success with intervention products. Our prospects in this market got an unexpected boost last week when the Texas education agency announced a new $15 million opportunity for reading intervention programs. That new funding will be spent during the 2008-2009 school year on Texas intensive reading initiative from grades 4 through grades 8. Three of our intervention programs have been adopted. That is reading triumphs, remember collective reading and Jamestown Reading Navigator. These help students who read below grade level.

Summing up the outlook for the elementary to high school market in 2008, a solid year is taking shape in the state new adoption market. The bulk of open territory orders traditionally comes in the third quarter and we are still looking for some increase in these states. This market should grow 1% to 2%. Obviously we are hoping for more. We still expect to gain share in the overall K-12 market which will grow probably 4% to 5% in the year.

In the testing market, we compete with a spectrum of assessment products. Acuity which is our new formative product continues to win new customers. We are winning new business for our K series which offers diagnostic assessments and instructor support for adult students, and with our LAS Links series for english language learners, Nevada extended contract with LAS Links to serve 80,000 english language learners in the state. Our system helps states ensure compliance with No Child Left Behind Title III requirements. And we are seeing some changes in No Child Left Behind requirements that play to our strength in testing. The US Department of Education has been permitting states to add a growth component to their school accountability programs, the growth model looks at the academic performance of individual students to determine if they are on track to become proficient. If students score below the proficient standard in reading or math, but are still making progress and appear likely to achieve proficiency, they may be counted upon the school's proficient students.

11 states have now been permitted to add a growth component to their state accountability plan. Growth components require the development of a vertical scale. We have strong industry recognized expertise in vertical scaling which links one grade to another so schools can see how students are progressing from grade to grade. Our Terranova testing series has scales and Acuity predictive test that enables us to show a growth through formative assessments a significant competitive advantage for schools and for teachers. In higher education International and professional markets, we saw some softness inspect second quarter as book stores cut orders and reduced inventory.

Some college text book exhibitors shifted the timing of their orders for the Fall semester from late June into early July. We expect softness in professional markets for the balance of the year. A combination of tough comparisons. Last year we had the benefit of a new addition of the Encyclopedia of Science and Technology, and this year we are facing the impact of the economy on book store sales. We now expect our US College and University business to grow about 4% to 6% this year; however, sales of our digital, custom and career product lines are showing stronger growth. The outlook is mixed in International markets.

So summing up for McGraw-Hill Education overall, slower growth in our Higher Education, professional and International markets may reduce the rate of increase in revenue this year for McGraw-Hill Education. Our original forecast called for revenue growth of 6% to 8%. We now estimate revenue growth of 4% to 6% in 2008 and we will have to see as orders come in August -- again, July-August we call the 60-day month. We are not changing our estimate, however, on the operating margin. Our estimate of 50 to 100-basis point decline in the segment operating margin holds.

Let's move then now to Financial Services. And for our Financial Services segment, the second quarter will probably be the most challenging of the year. S&P peaked last year in the second quarter achieving its highest levels of levels and operating profit as the structured finance market continued to surge. In face of tough comparisons this year, diversification and cost containment were critical factors in our performance. For the second quarter, revenue declined 10.4%, operating profit including a 15 -- and that's including a $15.2 million pretax or structuring charge was down 25.4%. And operating margin was 40.7% down from 48.9% last year. But restructuring charges reduce the operating margin in the second quarter by just over 200 basis points.

In a difficult first half, Financial Services produced an operating margin of 40.5% and that includes the second-quarter restructuring charge. The restructuring charge reduced the operating margin by 110 basis points.

The performance underscores some very key components about the outlook for Financial Services. First, diversification contributes importantly to our results. Secondly, our strategy buffers Standard & Poor's against decline in new issuance. Three, the cost containment will continue to be a priority, and fourth, and while there have been more headlines and new rule and regulatory proposals in recent weeks, there is no change in our assessment of legal or regulatory risk. In my opinion, both remain low. And fifth, our guidance for this segment in 2008 remains unchanged.

If the decline we experienced in the first half in structured finance continues for the remainder of the year -- and let me repeat that, if the decline that we experienced in the first half continues for the beginning of the year, then we believe that revenue for Financial Services could be off 7% to 9% in 2008. Under these circumstances, we can also expect a 500 to 600-point pullback in the segment operating. But that's if we experience a decline in structured finance we saw in the first half.

Let's examine these points in more detail and let's start with the impact of diversification. A key aspect of diversification is illustrated by this table, which compares results of Financial Services with new issued dollar volume in the bond market. Revenue for the Financial Services declined 10.4%. And S&P Credit Market Services was off 20.1%. But global new issue dollar volume fell 32.5% in the second quarter. Domestic revenue for the Credit Market Services was off 30.6% while total US issue dollar volume fell by 44.4%. In the second quarter, International revenue for Credit Market Services was down 3.3%. While International new issue dollar volume declined by 20%.

As we have forecasted, Standard & Poor's Investment Services produced double-digit revenue growth up 22.8% for the second quarter and 20.4% for the first half. We still expect double-digit revenue growth from these nonrating businesses for the full year.

We continue to expand in data and analytics both here and abroad. The Capital IQ products are attracting new customers in both domestic and International markets. Capital IQ now have more than 2,400 customers worldwide and that is a 23% increase compared to last year. Our index services are still rolling ahead adding new products and more customers. Assets under management and exchange traded funds based on S&P indices grew by 15.5% to $206.3 billion versus the same period last year. Sales of our custom indices and data also increased.

Trading and exchange traded derivatives based on S&P indexes have been robust. The average daily volume of contracts for the major exchange derivatives was 2,820,000 in the second quarter up 25% from the comparable quarter last year. And trading of over-the-counter derivatives also decreased substantially due in part to our products and that includes the S&P, GSCI index, the S&P Diversified Trend Indicator and S&P Commodities Trend Indicator and the S&P Select Plus Custom Series. Investment banks licensed these projects from S&P for create structured vehicles to link to their performance. For example, to pick one of them, the S&P Diversified Trend Indicator is as a composite of 24 highly liquid future contracts and they are grouped in 14 different sectors, evenly weighted between financials and physical commodities. The S&P DTI positions, each sector except energy, either long or short based on its price behavior relative to its moving average. And it is just another example of all the things that I think are possible with these kind of instruments. It is all about innovation and creativity. And there is an endless permutation with the numbers you can come up with, and we continue to expand.

Let me quickly recap this year's activity for S&P Indices. 18 new exchange traded funds were launched in the second quarter. 31 new exchange traded funds were launched in the first half compared 46 for all of 2007. And now a total of 175 exchange traded funds based on S&P indices. And we have more new indices on the launch pad for the second half.

Our efforts to diversify is not limited to S&P Investment Services. Diversification is also an important strategic activity at S&P Credit Market Services. Reducing S&P's dependence on the new issue market and expanding Internationally are the key initiatives. The 13.7% increase in nontransaction revenue for the second quarter and 12.5% for the first half are tangible measures of our success, clearly growth in this area help partially offset the decline in new issue markets. Nontransaction revenue includes surveillance fees, annual contracts, and subscriptions. All three categories grew in the second quarter as did deferred revenue for the Financial Services segment and incidentally, deferred revenue for this segment increased 12% in the second quarter to just over $840 million. We expect deferred revenue in this segment to continue growing.

In this environment, obviously cost containment is vitally important. We are closely managing costs while making investments to ensure that S&P are prepared for the turnaround this credit markets and growth in our nonratings businesses. We have taken a measured approach to restructuring by eliminating approximately 170 positions at the end of 2007, and another 246 positions in the second quarter. We have also reduced incentive compensation in our effort to streamline the organization. We will continue to examine the management structure and make process improvements. We are watching the hiring and that means very selective and reduction of discretionary expenses as a priority and Bob Bahash will provide more information on cost and expenses in just a moment.

The US structured finance market continues to show major declines in the second quarter. New issue dollar volume was obviously down, and you can see the numbers on the chart in front of you. 75.4 in April. 81.8 in May. 84 in June. 79 for the first half. Only the issuance of asset-backed securities is up after six months, but not by much, 2/10 of 1%. These bar charts, we have been illustrating the monthly comparison of US new issue volume since the beginning of 2008.

But there is a sequential improvement in US Corporate new issuance in the second quarter and June was the best month of the second quarter for public finance. But even a sequential pickup in structured finance is hard to spot. Based on early indications in July, we don't expect to see much change in these patterns this month. Year-over-year comparisons don't start to get easier until September.

There are signs that the market is healing but has not yet healed. Despite the turmoil in credit markets, investment grade issuers show strength in the second quarter as better-known issuers attracted receptive investors. Nearly all of the recent deals have been substantially oversubscribed, an indication that there is plenty of cash available. We think the Corporate outlook for the second half is promising, although speculative grade issuance will remain weak. We expect more growth in public finance, the state and local government pipeline continues to look strong. We expect growth in International markets in the second half. We will benefit from our geographic expansion into the Gulf and Central and Eastern Europe. Refinancing requirements of industrials in Europe should also be a source of growth and activity remains very slow in the structured market.

But we are seeing some interesting developments in the US residential mortgage-backed securities market. The focus will probably continue to be on the secondary market trade and the -- and all of the repackaging. As a result, S&P may have some opportunities to rate involvement securitization or [reremics]. Also growing US interest in covered bonds which have been issued in Europe since the 1700's. Some market participants believe covered bonds can stimulate the US mortgage market, but since the US does not have an explicit legal framework for cover bonds, there is now an effort to resolve that issue and Secretary Treasury, Hank Paulsen was referring to that the other day. If that efforts succeeds, large capital banks could be important issuers. The structure of bonds make them important because the investor has two levels of protection. Covered bonds are senior debt obligations of the issuing institution, secured directly on a portfolio of specific assets. The issuer is obligated to pay interest and principle on the bonds, but, for example, if the issuer defaults, the assets in the covered asset pool also are available to repay the covered bond.

Another opportunity for S&P is also emerging in structured finance. In the last eight years, an estimated 25 trillion dollars of securitized assets have been issued. The majority of these assets is still in the market and need to be monitored, revalued, priced for trading the secondary market. To tap this market potential, S&P recently created fixed income management services or the acronyms we are use is FIRMS, under the direction of Lou Eckleson and will provide market intelligence and analytic insight on risk driven analysis including debt, structured finance and the derivatives market.

As this slide shows, we have specific strategic initiatives for our target markets. The acquisition of "I Make" last year is the key to integrating credit risk monitoring, surveillance and evaluation platform. We have already established the partnership with super derivatives to create the largest coverage of assets in a single offering. And the redesign and relaunching of ratings direct is on track for next January.

Let me shift now -- and let's talk about the legal situation. And a little bit of the regulatory situation as we see it right now. We recently won our first court decision related to subprime litigation. Last week, the court dismissed the Bloomquest action, a suit that was filed in California last August, and it was alleging various state and Federal claims against various financial institutions, government agencies, McGraw-Hill, individuals, including myself. Last May remember we filed a motion to dismiss all claims which was granted by the court on July 23. Significantly, the court dismissed the case against us without giving the plan -- the plaintiff the opportunity to amend the complaint.

A new suit was filed in July, so there are now five that we are dealing with. The latest suit was filed in New York Supreme Court by ODDO, that's ODDO Asset Management against essentially Barclay's bank but lots of others as well including ourselves. The suit alleges losses in two structured investment vehicles and the confirmation of allegedly false ratings by S&P. In May and early June, the New Jersey carpenter health and vacation fund filed three separate lawsuits against issuers, underwriters and a whole host of people, including ourselves. These actions concern losses on mortgage-backed securities and allegedly inappropriate credit ratings. The action -- the class-action suit filed last August in the District of Columbia is being moved to the US District Court for the southern district of New York. The plaintiffs here seek damages related in the value of McGraw-Hill stock prices. These are traditional stock drop type suits. And it alleges because Senior Management allegedly failed to warn investors about problems from the structured market or in some of the products like S&Ps, residential mortgage-backed securities and CDO ratings. To wrap this up, we believe that all of the remaining suits are without merit and for our view the legal risk from these actions also remains low.

S&P remains obviously very active -- actively engaged with all regulatory issues and is making progress on our intense commitment to be a part of the solution, and that's why we are working very closely with policy makers and market participants around the world to enable greater transparency. And this is the most important thing in terms of helping to restore confidence in our markets, separating the facts from the headlines is not easy in this environment.

The level of activity increased substantially in June and July, so let's review some of the recent developments. On June 5, S&P and two other rating agencies announced agreements with New York Attorney General, Andrew Cuomo. The focus was on the US residential mortgage-backed securities, and as part of that undertaking, there were no findings of wrongdoing. There were no payments, and the New York Attorney General closed his investigation of the rating agencies. The agreement underscores our commitment and our strong, strong commitment to transparency, openness, and the strengthening of the governance process. The SEC held two public meetings in June to discuss proposed new rules and regulations for NRSROs. On June 11, the SEC discussed a comprehensive set of rules that have the potential to bring more transparency to the structured market and this included additional disclosure, increased record keeping and strength and management of potential conflicts. And the SEC put out these proposals for new rules and asked all market participants for public comment, and they would like them back by July 25. And I will summarize the comments that we submitted to the SEC in just a moment.

The other one was on June 25. The SEC met to discuss the use of NRSRO rating in its rules, namely the brokered dealer net capital rule and the money market fund investment rule. Comments to the SEC regarding these proposals are requested by September 5, and I will also review these potential changes in just a moment.

But first, I want to comment on the report issued by the SEC on July 8 after its comprehensive 10-month examination of the three rating agencies. Amid all the news stories on the SEC report, some critical conclusions got very scant attention. According to the SEC report, no evidence was found by the SEC staff that decisions about ratings methodologies or models were based on attracting or losing market share. There was no indication that the ratings agencies compensated analysts in a manner contrary to their policies. And the SEC recognized the rating agencies enhanced their procedures in connection with their registration as NRSROs in 2007. The SEC report did note that further improvements can be made in the management of conflicts of interest. At the conclusion of the examination, the SEC called for more documentation of the ratings process and recommended of that S&P conduct reviews in certain areas. The S&P is committed to doing just that. S&P will be implementing these recommendations and taking st to strengthen its ratings process accordingly and as you all know in the first half of this year we introduced 27 leadership actions in four categories, those categories were governance, analytics, information, and investor education.

As I noted earlier S&P on July 24 responded to the SEC's request for comments on its proposed rules. First I want to point out that S&P overall supports the SEC proposals. We are committed to cooperating with the regulators and policy makers here and abroad and we believe that the dialogue is extremely important and also the policy makers and regulators think it is extremely important. They recognize that the issues are complex and merit this discussion and that is why the SEC asked for comments on the proposed rules. This is not a game of gotcha. It is all about transparency, openness, and helping to restore confidence in our Capital Markets. And that is the context to S&P's response to the SEC on July 24.

S&P responded to the SEC on two levels: Commentary on the proposals itself and then observations on specific legal and related questions raised by the SEC staff. S&P's goal was to be constructive and seek clarifications where the proposals were not necessarily clear. We shared the SEC's desire to enhance investor understanding and address potential conflict of interest in the credit rating industry. At the same time, we believe that any new SEC rules should be narrowly tailored as required by the law and should not regulate the substance of credit ratings or otherwise impair the value of rating agencies independent opinions. For example, S&P fully supports the principle underlying the proposed rules that public ratings decisions should be made broadly and publicly available; however, S&P also believes that it should be able to control how it disseminates its data and intellectual property.

S&P agrees with the SEC that it should have policies and procedures that prevent it from structuring the products it rates. We already do that. But we are concerned about interference with the free flow of information between the rating agencies and their issuers. This is not a black box business, and communications between rating agencies and issuers should be encouraged, not inhibited.

S&P also believes the cost of the proposed rules, both for rating agencies and the market, have been underestimated by the SEC, and that's why S&P offered to share a detailed breakdown of these research on these matters from the SEC. These are some of the highlights from a 33-page letter S&P sent the SEC last week. If you have time and you are so inclined, I hope you will have a chance to read it, and you can access this letter at www.standardandpoors all spelled out lowercase, www.standardandpoors.com. We look forward to working with the SEC and market participants so that any new regulations lend themselves to openness, transparency, market competition, while remaining compatible with the existing law and regulation.

The SEC is also seeking comment on rule changes affecting the use of ratings to meet capital requirements, and I would observe that we didn't make the rules and believe we can continue to operate successfully if they are changed. We already do this outside the United States. We would be concerned if the proposed changes led to unintended disruption obviously in financial markets. Soon we expect to see a draft of proposed regulations from the European commission in so far as European regulators may consider additional oversight rating agencies, we believe such steps will be addressed through a globally coordinated approach, recognizing the benefits of consistency for investors and issuers operating an International businesses on this basis we will continue to communicate regularly with regulators around the world and we do that. That is say loft information on legal and regulatory, but I want wanted to make sure you had a complete look at the current situation. To sum up, we continue to believe that any new or currently proposed legislation regulations or judicial determinations will not have a material adverse effect on our financial conditions or results of operation.

So summing up for financial service, legal and regulatory risks remain low. Double-digit revenue growth for S&P Investment Services, revenue for the segment could be off 7% to 9% for the year if the first-half decline in structure finance continues for the remainder of the year, and this will result in a 500 to 600 basis point drop in the operating margin, again, if the first half decline finance continues for the remainder of the year.

Moving over to Information & Media. Growth in business-to-business products were key to the second-quarter results in Information & Media. In the second quarter, revenues increased 6.8%. Operating profit improved by 68.2%. And the operating margin was 9.3 compared to 5.9 for the same period last year. Revenue for the business to business group grew by 7.8%, even as advertising pages declined 11% at Business Week in the second quarter.

Strong global growth from Platt's news and pricing services and international auto consulting growth at J.D. Power and Associates was the key factors in this segment's second-quarter performance. Platt's is simply the Company's most global product. Proportionally it does more business overseas than any other McGraw-Hill product or service. The demand for petroleum and natural gas products which shows no sign of diminishing in today's volatile energy markets is clearly benefited Platt's, but Platt's is expanding into new areas too. Steel is the world's third largest commodity. Platt's just launched Steel Market Daily in 2006 and working with market participants to bring price transparency to this market.

We continue to make progress in construction. The electronic delivery of our information is a critical part of the transmission and continues to produce an interesting -- increasing, rather, share of McGraw-Hill construction's revenue. The advertising outlook at Business Week is challenging. Ad pages through the issue of July 28 are off 17.3%. And that is according to publishers information bureau, PIB. At the same time, Business Week's circulation is growing and new syndicated studies indicate that our audience is younger and more affluent than in years past.

Revenue for McGraw-Hill broadcasting group was off by 1% in the second quarter. Declines in the base business, primarily National offset our gains that we were able to record in political advertising, but we expect overall political advertising to be a strong component in the second half. In August, our Colorado station also benefit from a state primary, which includes contest force the US Senate and two House Representative seats. This fall in California we expect the ballot to include at least 11 propositions, including a controversial same-sex marriage proposition. Of course, all of our TV markets will benefit from the general election on November 4. So summing up for Information & Media, obviously more progress this year. Revenue growth of 6% to 8% and operating margin improvement.

That wraps up our review of Operations. And looking ahead for the corporation, it is clear that year-over-year comparisons get easier in the second half, and excluding second-quarter restructuring charges and related benefits, we still expect earnings per share in the 265 to 275 range, again, for the full year. Okay, let me -- let me hold it there. And let me turn it over to Bob Bahash, and he will go through the specific financials for you. Bob.

Thank you, Terry. I will begin with an update on our share repurchase program.

We are approximately halfway to our 15 million share repurchase target for 2008. In the second quarter, we repurchased 4 million shares for a total cost of $170.8 million, and an average price of $42.69 per share. That brings the first half repurchases to 7.4 million shares for a total cost of $304.8 million and average price of $41.19 per share. 20.6 million shares remain in the 2007 program that was authorized by the Board of Directors.

Net debt as of June 30 was $1.4 billion. This is up approximately $170 million from the end of the first quarter, and it is driven primarily by seasonal cash requirements, as well as funding for share repurchases. As of June 30, on a gross basis, total debt was $1.7 billion and is comprised of $1.2 billion of unsecured senior notes and $526 million in commercial paper outstanding. This is offset by $355 million in cash, primarily foreign holdings. Due to the seasonality of the business, debt levels tend to be higher in the first half of the year, and for the latter part of the year, we are focused on maintaining debt levels comparable to year-end 2007.

Let's review the outlook for free cash flow. As I indicated in our first-quarter earnings call, we expect free cash flow this year to be approximately $600 million, prior to any acquisitions or share repurchases versus approximately $900 million in 2007. To calculate free cash flow, we start with aftertax cash from operations and deduct investments and dividends. What's left is free cash flow, funds we can use to repurchase stock, make acquisitions, or pay down debt.

Precash flow for the first half of this year reflects a $319 million decline compared to the same period last year. The decline is due to reduced profits at Financial Services and the corresponding impact on working capital, an increase in working capital usage at McGraw-Hill Education as they prepare for the strong adoption opportunities, cash outflows for construction costs for the new data center that were accrued in 2007, and a one-time shift in the timing of our employee profit-sharing contribution from 2007 to 2008. Additionally the payment of the 2007 incentive compensation awards in the first quarter of 2008 negatively impacted 2008 cash flow. The cash savings from reduced 2008 incentive compensation will not be realized until the awards are paid out in 2009.

We had anticipated first half comparison will be particularly challenging due to the factors we just mentioned. We generate majority of the free cash flow in the second half of the year primarily due to the seasonality of the education business. In the second half 2008, we will benefit from easier profit comparisons a the Financial Services, reduced investments for purchases of property and commitment as to the second half of 2007 reflected significant investments in our data center building. Anticipated lower cash tax payments. And normal seasonal working capital improvements. As a result, we expect free cash flow in the second half of this year to approximate free cash flow for the second half of 2007, resulting from $600 million for the full year as we had forecasted.

Regarding net interest expense in the second quarter, we had $20 million compared to $12 million in the same period last year, an $8 million increase. We continue to expect it to be in the range of $75 million to $85 million for 2008. Our diluted weighted average shares outstanding for the second quarter was 321.1 million shares, a 29.2 million share decrease compared to the second quarter of 2007 and a 2.3 million share decrease compared to the first quarter of 2008. Corporate expenses were $33.5 million in the second quarter, a $7.5 million or 18% decrease versus the same period last year. This is primarily driven by reduced incentive compensation accruals as well as stringent expense controls. For 2008, we still expect a mid single-digit decrease in Corporate expenses.

I would like to take a few moments to discuss express growth at Financial Services and McGraw-Hill Education in the second quarter. At Financial Services, expenses for second quarter increased $17 million or 4%. Excluding the $15 million second-quarter restructuring charge, expenses were essentially flat compared to the same period a year ago with growth of just 0.4% or $1.5 million. This year-over-year expense comparison benefits from a $30 million reduction in incentive compensation and savings from the fourth-quarter 2007 restructuring actions. These expense savings were partially offset by the impact of acquisitions made in 2007 and 2008, the impact of a weakening US dollar on nonUS dollar expense and investments in fast-growing areas such as CRISIL, Capital IQ and Index Services. Financial Services sequential second-quarter expenses increased $52 million or 13.5% versus the first quarter. The primary contributors to this expense increase are the previously announced restructuring charges of $15 million, a $20 million increase in incentive compensation provision versus the very depressed first-quarter levels, and a $17 million increase in. Broad expense categories for a strong growth business, for example, Capital IQ, index services and CRISIL.

Expenses at McGraw-Hill Education increased 6.1% in the second quarter. Adjusted for the second-quarter restructuring charge, expenses grew $26 million or 4.6%. The increase is driven by $9 million in higher prepublication costs, increased marketing costs related to the strong state new adoption market opportunities, as well as investments in technology, including $3 million in data center and migration costs. These increases were partially mitigated by benefits from the fourth-quarter 2007 restructuring and reduced stock-based compensation. Benefits from the second-quarter restructuring will be largely realized in the second half of the year.

I would like to provide an update on the migration of our digital product and services to the new data center, a key effort as we increasingly deliver products and services electronically. The migration is going very well. In the second quarter, the migration costs were $9 million. For the first half it was $13 million. We continue to expect that overall cost also be about $40 million for 2008. McGraw-Hill Education represents $18 million or almost half of those costs as this segment continues to deliver more digital content and services.

On that review, unearned revenue, which was $1.1 billion at the end of the second quarter, it reflects a 7.5% year-over-year increase. Financial Services represents approximately three quarters of unearned revenue and experienced growth of 12%. This growth was partially offset by our reduction at McGraw-Hill Education due to accelerated fulfillment of orders for basal specs and other components, increased use of delivery. It for 2008 we continue to expect unearned revenue growth will be in the mid single-digit range compared to last year given the forecast for slower growth at Financial Services. In terms of our effective tax rate, we expect the rate to be 37.5% in 2008, approximately the same as 2007 on a full-year basis.

Let's now look at capital expenditures, which include prepublication investments and purchases of properties and equipment. In the second quarter, our prepublication investments were $65 million compared to $75 million in the same period last year. We firmed up our estimates and now expect $270 million for 2008, versus the previous projection of $290 million that we provided during the first-quarter earnings in the Fall. Purchase of property and equipment were $25 million in the second quarter compared to $61 million in the same period last year. This was higher last year while we were building the data center, but we have returned to a more normalized rate this quarter. For 2008, we continue to project $160 million for Cap Ex, and this includes normal replacement expenditures, additional purchases of software and technology equipment for the new data center, and continued investments in technology.

And finally now, noncash items. Amortization of prepublication costs were $66 million, compared to $57 million last year. For 2008, we are lowering our guidance to $275 million. This represents a $35 million increase versus 2007, and it is driven by significant prepublication investments to take advantage of opportunities in the L-high market. Depreciation was $30 million compared to $29 million in the same period last year. We still expect it to be about $125 million for the year, reflecting completion of the data center, the purchase of new technology equipment for the data center, and other general increases in capital expenditures. Amortization of intangibles was $13 million compared to $11.5 million in the same period last year. And for 2008, we continue to expect approximately $52 million.

Thanks and back to Terry.

Okay. Thanks, Bob. As we came into this year, we knew this was going to be a first-half, second-half kind of year, and -- and we are pleased, with the performance given some of the difficulty in the markets. Obviously with continued uncertainty in financial markets and some of the economic conditions still existing, year-over-year comparisons obviously get easier for us in the second half, and we are pleased that there is no change in our full-year earnings forecast. There are a number of focuses here. Obviously, with the assessment of legal and regulatory risk being lower, but our commitment to our share repurchase program and our commitment to cost containment are imperatives in this. With that, let me turn it to Don Ruben and any questions or comments that you may have.

Thank you, Terry. (OPERATOR INSTRUCTIONS) We will now take the first question.

Our first question comes from Peter Appert with Goldman Sachs. Please go ahead.

Thank you. Terry, a couple of questions on the S&P business. First, the SEC is very proactive in terms of trying to bring more players into the ratings industry. Can you give us your thoughts on how the competitive dynamics in the market are changing land specifically you are seeing any implications in terms of pricing?

Okay, Peter. Thanks. Really no on this one. I mean -- really what we are seeing in the market plays -- we are seeing, some nice growth in the corporates and government size ratings and also in the public finance side. But obviously the extreme weakness on the structured finance new issuance is the issue there. But in terms of the activities that we have, it is pretty much, market as usual. I mean it is the same players in that part. And, again, we are really fairly early on in some of the uncertain conditions. And, therefore, I wouldn't expect to see, that kind of new participation that the point. But, no, we are working on it ourselves, and making sure that, we are doing everything we possibly can. And I mentioned the 27 leadership actions to get higher transparency in all those kind of things, but no impact from increased competition.

Have you done anything at pricing here at S&P?

Nothing differently. Again in terms of pricing mechanisms, it is pretty straightforward in terms of, whether it is a very complex instrument or less complex instrument. And we have not changed any of our pricing policies.

Year to year, have you made price increases?

In areas where there is activity, normal increases. Obviously with a weakness in structured finance, that's -- that's a very different issue.

On average, Peter, price increases have been in the range of 2% to 3%.

Okay.

In areas that we have increased price.

Okay. And then, Bob, what should we look for in terms of year-to-year expense trends in the second half within the Financial Services business. Typically I am thinking you get the benefit of staff reductions, but is that fully offset by incentive comp comparisons getting tougher in the fourth quarter?

Yeah, the incentive comp comparisons will be a bit more difficult because as you may recall, last year, we were adjusting incentive comp accruals in the third quarter and more dramatically in the fourth quarter. So that will certainly have an impact. But the Financial Services team is very focus on maintaining cost contingencies, very strict on the cost side on the market services side. But I do want to emphasize that we continue to investment in those Investment Services business that has been growing at 20%. We expect the growth rates -- we are not really projecting growth rate for the second half of the year, but will be very strong and robust so we will continue to make those investments in those areas, but we are benefiting and will be benefiting from certain -- from those restructures actions. So I think you are going to look for continuing trend from what we saw on sequential basis first-quarter to second quarter going out for the next couple of quarters this year.

Yeah, Peter, just to add to that. It really is the tale of two cities. Those areas where there is activity and growth as Bob was saying, we are not cutting back there obviously and in fact we are pushing aggressively to make sure that market penetration and share are factor there is. Corporate governance and public finance, are doing well, and we are seeing some strength in the asset-backed market as we were talking. The mortgage loan market is obviously impacted, and you will see continued cost containment, but as Bob said also the Investment Services side is doing very well. So it will be dependent upon activity levels.

So, Bob, just so I am clear on this, you mentioned similar sequential patterns versus the first to the second. First to the second you saw fairly significant increase in costs. So we look for cost to be up fairly meaningfully then in the second half?

Increase in the second quarter on a sequential basis, there were really three items. One was the restructuring amount, roughly $15 million. The other was an increase on a quarter-to-quarter basis of about $20 million for incentive compensation. When we completed the first quarter, we were really taking that run rate going out for the balance of the year and maintain a very, very low level for incentive compensation. Not that we have seen a big increase, but we see a little bit of light, especially the continuation of benefits from the Investment Services side, so as a result, the accrual rate for the incentive compensation increased by $20 million on a quarter-to-quarter basis. And then there was basically only about $17 million of investments added for those growth businesses. So that's why I say we have got the cost controlled for those areas that we want to control it and we are making investments for those areas that we need to.

Okay, thank you.

Thanks, Peter.

Thank you, our next question comes from Craig Huber with Lehman Brothers. Please go ahead.

Yes, good morning. I just -- in light of your second quarter performance, can you just discuss, just maintaining your 265, 275 EPS guidance for the full year including restructuring charges. Are you trying to be conservative to see how things play out in the next six months, why you haven't raised that.

Well, Craig, again, the first half had a lot of uncertainty to it and we are seeing a different second half, comparisons should much definitely be easier. We got an education quarter in the third quarter and so forth, but, again, a fair bit of uncertainty in the market about how things are going to come back, what will come back, when will come back and all of those kind of things, and I think -- the guidance that we have given is very appropriate for the conditions. If that changes, and so forth, so will we. But at this point, I think that 265, 275, is a good range to adhere to.

Also, can you talk a little bit about what you are seeing in July in Financial Services across the various categories. Any significant change there versus what you saw in the second quarter? Thanks.

Well, Craig, obviously the second quarter was still impacted significantly. What we have seen is some pick-up in the structured finance area in the asset-backed area. We have also seen some increases on the corporates and governments side in terms of investment grade, issuance on that one. Again, we are in the middle of a credit crunch, and we have to see that unwind and the uncertainty on timing is certainly there. But hopefully, things start to relax a little bit and we start getting back to a growth mode. But I do think that notwithstanding the comments that David Weiss made as our Chief Economist, that I think we benefited from the stimulus package, and we still have a fourth and first quarter of next year that will probably be negative, and then we will start to see some low slow growth. So, the Capital Markets will reflect I think some of those conditions.

And lastly if I may. Asia, was that about 10% of your ratings, revenues of the quarter and the other part of the question is how it Asia new issuance do for your company in the second quarter. Thanks.

In breaking out issuance and the like, these are cross border securities and the like and we don't break out exactly what issue, pertains to which region. The Asia region obviously is a very important region to us, and will only get more so going forward. But it is, and still the United States and Europe are the largest component of that, but increasingly, the Middle East, Central, Eastern Europe are going to become as important as some of the Asian markets, so, again -- lion's share is in the developed countries.

I am sorry you said that Asia held up much better than US and Europe in the second quarter?

The Asian markets are feeling less of the capital market retraction obviously than the developed countries, yeah.

Especially when you include into Asia which we of course naturally do CRISIL which continues to show very strong growth. Asia in terms of the regions one its third, US, UK, Europe and Asia, and Asia did hold up better because they were not plagued with the level -- some of the structured products that the other two markets were.

And increasingly going forward, longer term, the Asian markets are going to be, critical to our growth patterns.

Thank you.

Thank you. Our next question comes from Michael Meltz with JP Morgan. Please go ahead.

Great. Thank you. Two clarifications please on S&P. I think Craig had asked any change in business tone in July relative to Q2 -- I think he met on the transaction -- I'm wondering on the transaction side. Terry, is that what you were comments were saying when you talked about investment grade picking up and aspect picking up -- is that in July?

Yes, exactly. We saw some in the early part of the second quarter. As I think some corporate treasurers are taking advantage of the fact that they had the ability to get into the markets, but, yes, we are starting to see some pick-up on the corporate and governments side. We are pleased by, the pick-up on the public finance side, which we hadn't expected a little bit, but the asset-backed I think is signs that part of the structured market are starting to come back, but, again, it is going to be a bias against speculative, and a plight to quality.

Okay. On the nontransaction -- I guess you are calling the relationship revenue, that was up big sequential alely, up $30 million. Can you talk about -- that is a lot of extra relationships there. What was driving that? Was that mostly research? What is in that number in the big jump in the quarter?

Well,s if a lot of things. But most important, of course, is surveillance fees. You have a -- Bob, you may want to comment on the deferred revenue, but there are a lot of relationship fees here and surveillance fees. People forget, that there is a pull-back in a new issuance structure finance but you have $35 trillion of rated structured finance product in the market that is doing well, and it needs to be monitored and surveyed, and we have relationship fees on that, and that relates to the deferred revenue. Bob, do you want to --

In addition to relationship fees, there are very significant credit information products such as ratings direct and other products like that which have experienced rather significant -- dramatic growth. They account for a good portion of that increase as well.

Okay. Peter had asked a question about the expense trend. I am sorry I still don't understand the answer. Expenses excluding the charge were up $35 million versus Q1. Are you expecting that type of increase to persist in Q3 or Q4? Can you clarify your comments, Bob?

Sure, the of the $35 million, $20 million was incentive compensation. Depending upon how the year progresses both for the ratings side and the information side, that will dictate the level of incentive compensation accruals going forward. So if you separate out incentive compensation -- and what I am trying to say here is incentive compensation is going to be driven by the overall performance of the business, but separating out incentive compensations, the core expenses for people, physical locations, et cetera is maintained in very, very tight control. Pretty much very modest increase for Credit Market Services. The only areas where you are seeing some increases in appreciate increases will be on the Investment Services side. That is the clarification point. I am trying to separate the incentive compensation which is going to be affected by the overall performance of the business and keep the response to the core expenses that that we are managing on a day-to-day basis.

Thank you for your time.

Thanks, Michael

Thank you. Our next question comes from Edward Atorino from Benchmark. Please go ahead.

Hi, migration costs, did they disappear mostly in '09? Or is there some kind of carryover, whatever you want to call it on the migration numbers?

The migration costs -- the plan right now, Ed is that we will move -- we will go into the first quarter of 2009 and hopefully at that point we will have completed the entire migration. There is a possibility we might step that up and have some of the applications that were planned for the first quarter moved in the fourth quarter of this year. But in -- the specific answer to the question is at most we will have one quarter's worth of migration costs in 2009, that being the first quarter and then it is done.

What were the actual shares at the end of the second quarter? Not the average, the actual?

Okay, just a minute.

Okey doke.

Do you want basic or diluted?

Both. How about both.

You shouldn't have asked that.

Right. We will get that in a minute.

Okay.

As soon as we get that, we will get that out, Ed.

Okay, thanks.

Here we go. Basic is 317.6 million shares.

And fully diluted?

319 million.

Thank you.

You are welcome.

Thanks.

Thank you. Our last question comes from Catriona Fallon with Citi. Please go ahead.

Hi. Thanks for taking the question. Just a clarification on your regulatory comments. You indicated that you think the SEC doesn't quite realize the extent of the cost involved with some of what they are asking for. Does that differ from your comments about not seeing regulatory or legal issues actually impacting your financials? Or would that be actually an increased cost and a crunch on margins.

No, all costs and all estimates of regulatory and compliance are in the numbers that we have here. We are talking about, new rule changes that the SEC is posing for US issued securities. And, again, this is a comment letter. This is a letter that they send out to all market participants and ask for comments. And we are saying that, -- we work very, very well with the SEC, and we both have the same objective of bringing more transparency and confidence restoration back into the markets. And we have talked about a lot of the leadership changes that we are taking and with them on this one. There is a point, where you got to be careful, I think, and one of the comments that we were making between open-market behaviors and market regulation. And you want to construct a balance here. You don't want to get unintended consequences and costs. We want to make sure that in terms of our reflection on the new rules, that we are trying to strike that balance. In the market and that is what we were saying.

Okay, just to follow up on index fees. There is a slight sequential increase in revenues due to indexes. Is that primarily due to new ETS that are being performed and could you also speak a little bit about how those are -- how those fees are charged and collected. Is it on a monthly basis and is this calculated on monthly basis so none these fees are in deferred?

Obviously on a monthly basis we record on that, but again it depends on where the various indices or new indices are launched, but as I was saying in -- in my remarks that, the activity, in the first half, has been extraordinary. And the receptivity for these products worldwide are it shall are really good. And so we have been very aggressive in pushing these out, and we will continue -- we are at a pace -- last year is a very strong year for indices and we are at a pace at the end of the first half that is, pushing the full-year 2007. We are very pleased with this kind of product and the receptivity of the product and we will continue to be aggressive in pursuing it.

Can you comment on the margins for that business?

Tight. We don't break it out, but those are terrific businesses. Obviously in terms of the most important thing is making sure that you are being very responsive to various investor constituents and that you are coming out with product that they want to be able to utilize and develop on. And if you are doing so -- those are very, very nice businesses.

Catriona, one clarification on the question you asked, are they in deferred revenue. There are various different relationships that we have. Only a very small amount is in deferred revenue. Less than 5% of the Financial Services deferred revenue will relate to index services. A relatively modest amount.

Okay. My last question is the nontransaction revenue. Are you signing new corporate relationships? You mentioned the increase in deferred is surveillance fees coming on, are there any new corporate relationships at this time? Or not really.

Well, for new investment grade issuers, there would be. But it is not significant at this point in time.

Okay. Thanks.

Thanks, Catriona.

Thank you. Our next question comes from Michael Meltz with JP Morgan.

All my questions have been answered. Thank you.

Our last question comes from Craig Huber with Lehman Brothers. Please go ahead.

Yes. I did have a question about education. You talked about why you lowered your guidance for the year and adoption market for 2009, in the past, you thought it would be an $850 million to $900 million market for 2009. Is that still the case from your vantage point or has that changed?

The guidance for 2009 in terms of the new adoption market is unchanged. And in terms of -- the revenue projections, Craig, the K-12 market is obviously off to a really good start, and we are very pleased and the projection of a 33%, market capture, would be a very good number, and we are very, very pleased obviously with reading in Florida and California with science and so forth. So that's doing very well. We want to watch that open territory, and we still have that at 1% to 2%. And that is, -- I mean what we are seeing is, strength in some of the southern states and in some of the Southwestern states and we are seeing some conservatism obviously in the northeast and central states, and so there is a mix here that is going on. So we are going to hold to the 1%, 2%, but obviously we are hoping to see that better and we will know more toward the end of August and September as far as that part. In Higher Education -- again, July, August as from a timing standpoint is a 60-day month. And so where you see the increases and so forth. And so, we are seeing it as a little bit softer, then what we would have expected but we have to see what August does and so we are monitoring that carefully. But I think it is just -- prudent, to say, okay, 4 to 6 is a better number right now. And we hope to be, at the upper end and all of those kind of things, but, given where we are right now 4 to 6 is a good number.

Thank you.

Thanks, Craig.

Thank you, that does conclude this morning's call. A PDF of the slides will be posted to the Investor Relations web site for downloading from the web site this morning. On behalf of the McGraw-Hill Companies, we thank you for participating and wish you a good day.