標普全球 (SPGI) 2008 Q4 法說會逐字稿

Good morning and welcome to McGraw-Hill Companies fourth-quarter and full-year 2008 earnings call. I'd like to inform you that the call is being recorded for broadcast and that all participants are in listen-only mode. We will open the conference to questions and answers after the presentation and instructions will follow at that time. (Operator Instructions).

I would like to introduce Donald Rubin, Senior Vice President of Investor Relations for McGraw-Hill Companies. Sir, you may begin.

Thank you and good morning to our worldwide audience and thank everyone for joining us at the McGraw-Hill Companies fourth-quarter earnings call. I'm Donald Rubin, Senior Vice President of investor relations at the McGraw-Hill Companies. With me this morning are Harold McGraw III, Chairman, President and CEO, and Robert Bahash, Executive Vice President and Chief Financial Officer. This morning the Company issued a news release with our fourth-quarter 2008 results. 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. Once again, that's www.McGraw-Hill.com.

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 teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions that are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports followed with the US Securities and Exchange Commission. We are aware that we do have some media representatives with us on the call, however this call is for investors and we would ask that questions from the media be directed to Mr. Steve Weiss in our New York office at 212-512-2247 subsequent to this call. Today's updates will last approximate an hour. After the presentation we'll open to questions and answers.

It's now my pleasure to introduce the Chairman, President and CEO of McGraw-Hill Companies, Terry McGraw.

Okay. , thank you very much, Don, and good morning, everyone, and welcome to our review of the full-year and fourth-quarter earnings and the outlook for 2009. With me is Bob Bahash, Executive Vice President and Chief Financial Officer. On today's call we will be providing information on our performance in 2008 and discuss our outlook for 2009. After my review of operations Bob will then provide a little bit more in-depth look at our strong financial condition, as well as our outlook for free cash flow for 2009, and obviously after that we'll take questions and comments and go in any direction you would like.

As Don said, earlier this morning we announced results for the fourth quarter and for the full year. I'm very pleased to report that we delivered on the high end of our guidance for the fourth quarter and for the full year. Let's briefly recap those results. For 2008 we reported 2008 diluted earnings per share of $2.51 and that, of course, includes a $0.14 per share restructuring charge. Also revenue declined 6.2%. For the fourth quarter of 2008 we reported diluted earnings per share of $0.37 and that included a $0.05 per share restructuring charge. Revenue declined by 9.8%. To help control expenses we reduced incentive compensation in 2008 by $273.7 million. The restructuring actions in 2008 resulted in a workforce reduction of 1,045 positions. Cost containment was a priority for us in 2008 and it will be the same again for this year. If more actions are necessary for this year we are prepared to take them.

The challenge in the current environment obviously is to manage for today while preparing for tomorrow. We will and we still must see how the massive recovery package coming from the federal government will, first: One, stimulate the economy; second, relieve pressures on state and local government; three, help educational funding; and four, improve the sentiment in capital markets. Slower economic growth in the weakened housing sector will affect the state and the local tax base. At the same time, the demand for local government-supported projects may lead to more debt financing. We have seen this trend before. Historically, there is a clear, inverse correlation between state and local operating balances and municipal debt issuance.

The changing financial landscape is both a source of new challenges and new opportunities. While circumstances are favorable, we have responded by investing in fast-growing businesses at Standard & Poor's. The confluence again of content, technology and distribution is also creating opportunities to improve our potential by producing new digital products and services for an audience eager to acquire 21st century skills. We are doing so to maintain our leadership. In this environment we must also preserve and protect a very strong balance sheet. A strong balance sheet has been the hallmark of this Company and we plan to keep it that way. Our cash flow is more than sufficient to meet our requirements for operations, making investments, paying down debt, and returning cash to shareholders. We have paid a dividend every year since 1937, and we've increased it every year since 1974. That is 35 years of increasing the dividend. Few companies can match that record of consistency. The next decision on the cash dividend will be made tomorrow at the board of directors regular monthly meeting, and believe me, our board understands the importance here.

With that background, let's review the operations and then 2009 guidance for each segment and let's begin with Financial Services. A resilient and diverse portfolio helped cushion the Financial Services segment in the midst of a credit crunch and very challenging comparisons with a very robust 2007. Revenue for S&P Credit Market Services in 2008 declined by 22.5% and by 24.5% in the fourth quarter. Revenue for S&P Investment Services -- that's our non-ratings business -- grew by 15% last year and by 7% in the fourth quarter. In 2007 S&P Investment Services produced about 26% of Financial Services revenue. In 2008 it rose to 34% of the total. Revenue for the segment declined by 12.9% for 2008 and by 15.4% in the fourth quarter.

In the face of adverse market conditions we continue to manage our costs diligently. After pretax restructuring charges of $25.9 million for a workforce reduction of approximately 340 positions and a $166 million decrease in incentive compensation, operating profit declined 22.4% in 2008. In the fourth quarter, after a pretax restructuring charge of $6.6 million for a workforce reduction of approximately 50 positions and a reduction of $36.6 million in incentive compensation, operating profit declined 18.6%. All that effort enabled us to report a 39.8% operating margin for the year and a 34.4% operating margin in the fourth quarter. The restructuring charges reduced the 2008 operating margin by 98 basis points for 2008 and by 105 basis points in the fourth quarter.

The decline in new issue volume obviously had a major impact on 2008 results. As these bar charts illustrate, the decline in the US structured finance new issue dollar volume was pronounced all year. For 2008 US structured finance new issues dollar volume was off 79.9% and the weakest in the fourth quarter with an 89.4% decline. Now, corporate and public finance issuance fared better. US corporate dollar volume issuance was off 33.8% for the year, as the high-yield market dropped by 73.7%. In the fourth quarter, US corporate dollar volume issuance was down 39.3%, as the high-yield market came to a virtual halt, dropping by 96.3%. But while the new issue dollar volume last year was the weakest in the fourth quarter, it's not the whole story for Standard & Poor's. As this table illustrates, the revenue performance for the segment and the S&P Credit Market Services did not come close to matching the fourth quarter decline in the US or the global new issue dollar volume.

A key to our resiliency in the ratings business is the non-transaction revenue, and that number grew by 5.2% in 2008 and represented 73.1% of S&P Credit Market Services revenue. In the fourth quarter non-transaction revenue declined by 4.8% and accounted for 78.9% of rating revenue. About 90% of the non-transaction revenue is recurring, and as you all know it comes from surveillance fees, annual contracts, subscriptions and so forth, and the recurring -- the reoccurring portion grew all year. Our non-transaction revenue also includes other services, such as bank loan ratings which are not reflected in the public bond issuance. A sharp decline in bank loan ratings was the key in the fourth-quarter decline in non-transaction revenue. We expect non-transaction revenue to grow in 2009. It will be helped by modest price increases. The majority of annually renewable contracts are with large investment grade companies, financial institutions, governments, and government-related entities. These entities will continue to access the public debt markets.

Our subscription services -- this would be ratings direct and ratings express -- provide vital information and this month we increased their value as a global credit portal to the market with major enhancements. Given all the uncertainty of the current market conditions, the outlook for transaction revenue is very hard to call. To be clear, we define transaction revenue as the new public issuance of corporate, public finance and structured finance instruments. We expect new issuance to get off to a slower start this year but anticipate a better run rate in 2009 than we experienced in the fourth quarter of 2008. Still, we don't expect growth in new issuance in 2009. At best, we think it could possibly be flat.

Spreads remain a key gaining factor in S&P's market. Firms are deleveraging and rationalizing balance sheets, but a more substantial contraction in spreads probably won't materialize until investors see clear signs that deleveraging has run its course. There are positive signs. Various federal initiatives designed to improve liquidity have had some success at the short end of the market. That's a critical first step for spreads to tighten for long-term credit. Based on what issuers and investors are telling us, there are indications of pent-up demand in the investment grade market. LIBOR spreads are the key cost of funds benchmarks so we're watching them very closely. The rate has come down sharply in recent weeks and the three-month LIBOR is currently approximately 1.15%. A declining LIBOR rate obviously is an indication of lower perceived risk in the banking industry and helps facilitate more interbank lending, which is something that we need to see.

We are also looking for narrowing spreads on credit default swaps and improvement in spreads for both investment grade, as well as in high-yield bonds. Stabilization of the housing market would be a big plus for everyone. Home prices on average have fallen 21% since July of 2006, and that's according to the Standard & Poor's Kay Schiller 20-city index, and there's probably more to go. S&P's chief economist, David Wyss, expects housing prices to bottom out probably around 30%, peak to trough by the end of this year.

For S&P Investment Services top comparisons the revenue grew by 15.6% in the fourth quarter of 2007, and consolidations in the financial markets were factors in the lower rate of growth in the fourth quarter than in previous three quarters of 2008. Probably another factor here is the assets under management in exchange-traded funds hit an all-time high of $235 billion at the end of 2007 and declined to $203.6 billion at the end of 2008, but a good year nonetheless. Still we look forward to more improvement this year in our non-ratings business. In one of the worst years for equity since the 1930s, our index services turned in an outstanding performance. We benefited from market volatility, which produced increased trading volume of derivatives based on S&P indices. In the fourth quarter alone there was nearly a 47% increase in the average daily volume of major exchange-traded derivative, and these are all based on our indices. More than 4.1 million contracts were traded daily in the fourth quarter of 2008, and that's versus just over $2.8 million in the fourth quarter of 2007, and, of course, Standard & Poor's is paid every time a contract is traded.

Assets under management in exchange-traded funds based on S&P indices declined year over year by 13.5%, but we also saw new in flows to exchange-traded funds creating a substantial increase in the number of shares invested in ETFs. That's a very positive development. We have also seen greater use of exchange-traded funds as hedging tools. We continue to find new opportunities to expand this market. In the fourth quarter, 14 new exchange-traded funds based on S&P indices were introduced. For the year, 59 exchange-traded funds were launched. There are now 203 exchange-traded funds based on S&P indices and there is more in the pipeline.

New products, the growth in shares outstanding in ETFs based on our indices, and the increasing diversity of our offerings should benefit us again in 2009. Despite the contraction in Wall Street we continue to make progress with Capital IQ -- very pleased hear -- finishing the year with a client base of over 2,600, a 19% increase for the year. At the end of the month Capital IQ will add new data and functionality enhancements and a new portfolio attribution tool to combat the cutbacks and the consolidation among financial firms. A key part of Capital IQ strategy is to add value with this new data offerings and this improved functionality.

With litigation about S&P ratings in the news, there was some confusion earlier this month when the European Commission announced it was opening up formal proceedings with Standard & Poor's and the matter raised some questions, so let me clarify that situation. First, the proceedings have nothing to do with ratings. Secondly is that we're not dealing with a lawsuit or anything like that; it's only a review regarding our licensing practices,. And third, the proceedings involve complaints against the CUSIP Service Bureau, which S&P operates on behalf of the American Bankers Association. And as many of you know, CUSIP -- C-U-S-I-P -- is the acronym for the Committee on Uniform Security Identification Procedures. This system started in 1968 when the American Bankers Association appointed Standard & Poor's to develop and administer a system for uniquely identifying each US stock and bond with a permanent nine-digit code to facilitate the smooth settlement and clearance of security transactions.

For 30 years the CUSIP Service Bureau has been licensing commercial databases containing CUSIP numbers and associated descriptive data. Financial institutions seek access to these databases for a wide array of purposes that go far beyond the clearance and the settlement activities. So last summer, the European Commission received a complaint from several associations representing financial institutions and asset managers that the CUSIP service bureau was allegedly abusing its position in the European market by requiring licensing fees for use and access to the CUSIP Service Bureau's database of 12-digit ISIN numbers, which are derived from CUSIP, and associated data. They challenged the legal right of CUSIP Service Bureau to control access to its valuable and proprietary databases. These institutions wanted free access.

In essence, the dispute is not about access to ISIN numbers for their primary purpose of settlement of cross-border security transactions. These identifiers are available to market participants free of charge. Rather, these Europeans have developed other uses for these identifiers, such as the management of internal databases, and demand free access for our commercial databases. The complaint is without merit. It misrepresents the licensing activities of the CUSIP Service Bureau and ignores the fact that our licensing practices and changes are wholly transparent and in line with industry practices.

There also is a new shareholder derivative lawsuit. As a shareholder the Teamsters Allied Benefits Fund is suing the board of directors and some corporate executives. The faulty premise of this complaint is that our board of directors and corporate executives allegedly knew there were problems with ratings followed by purported misstatements in public filings on the results and operations of the S&P ratings business, and, again, this suit is totally without merit.

On the regulatory front there is more work to be done here, and the outreach to key policy makers, regulators, politicians here and literally around the world is an ongoing process and we're very active here. In Europe we are meeting with European member states and members of the European parliament. We are participating in member state and Pan-European meetings. Finance ministers, central banks, supervisors are all on the itinerary. In the United States we are awaiting the publication of final NRSRO rules by the Securities and Exchange Commission. S&P continues to discuss global regulatory developments with the SEC and that's an ongoing issue. We believe that smart regulation will help strengthen financial markets, and S&P is working very hard to be a very integral part of that solution.

In this environment we also continue to strengthen our organization. As a part of the leadership actions we appointed an ombudsman for Standard & Poor's Credit Market Services effective February 16th. Ray Groves will be S&P's first ombudsman. He was with Ernst & Young for 37 years. He served as the firm's chairman and chief executive officer for 17 years until his retirement in 1994. The ombudsman will address concerns about conflicts of interest and analytical and governance issues raised inside and outside the Company. The ombudsman reports directly to me and has accountability to the audit committee of the board of directors. He will also report annually to the public.

Now, many ideas have been suggested about the regulation of rating agencies and we think they should be thoroughly, obviously, explored. Managing the potential for conflicts of interest in the ratings process is a key issue. We agree. We have always agreed to that. We also believe that no system is completely free of conflict, but we do believe that conflict can and should be managed through greater transparency. In fact, the key issue for financial markets is transparency. That's why Standard & Poor's has taken 27 leadership actions. These are action steps to improve its process and procedures and that's a forever and ongoing process. That's the reason for creating the office of the ombudsman and that's why Standard & Poor's makes its ratings available at no charge to the market and in real time. And because S&P's opinions are freely available to everyone the market is free to assess our decisions and our business model makes this transparency possible.

Okay, let's sum up then for the Financial Services segment. Growth in non-transaction revenue will help cushion the uncertainty in the new issue market of 2009, and we may start to see some pick up in new issuance, especially in the second half. Growth in S&P Investment Services will continue and a slower start to 2009. Our guidance for 2009 for the Financial Services segment is low single-digit revenue, probably about 1.5%,2% growth, and a margin decline of 250 to 300 basis points, and that's excluding the 2008 restructuring charges.

Okay, let's now take a look at McGraw-Hill Education. Gains in the US higher education partially offset a decline in the elementary, high school market in 2008. McGraw-Hill's School Education Group's revenue decreased by 5.4% in 2008 and by 18.6% in the fourth quarter compared to 2007. McGraw-Hill's Higher Education, Professional and International Group's revenue increased by 1% in 2008 and declined by 2% in the fourth quarter. This group accounted for 48% of the entire segment revenue in 2008. Revenue for this segment decreased by 2.5% for the year and 8-point -- and 8% in the fourth quarter. Cost cutting was a priority for the segment, as market conditions softened during the year. Including pretax restructuring charges of $25.3 million for a workforce reduction of approximately 455 positions and a $29.3 million decrease in incentive compensation, the operating profits declined by 20.9% in 2008.

In the fourth quarter, including a pretax restructuring charge of $11.4 million for a workforce reduction of approximately 215 positions and a $7.8 million decline in incentive compensation, the segment had an operating loss of $14.3 million. The operating margin for 2008 was 12%. The restructuring charge reduced the operating margin for the year by 96 basis points. For the most part, the fourth quarter in Education is not seasonally significant, except in some years for the US college and university business. December is traditionally the key month of the fourth quarter for higher education, and that certainly proved true again in 2008. A late surge in sales enabled Higher Education to finish the year on an up swing and in a good position for 2009. Still, we didn't quite match the US college market's estimated 3% sales gain in 2008. Our performance in 2008 resulted primarily from the fact that we published fewer major titles in 2008 than we did in 2007.

With a more robust list for the new year we expect to stay in step with the industry in 2009. We also will benefit from a growing lineup of new digital offerings that include individualized online tutoring, a lecture capture service that gives students access to course-critical lectures and an assessment placement tool that enables schools to determine the most appropriate courses for entering students. And that we're developing off of our Alex artificial intelligent base capability. For 2009 we have also launched a new generation of Homework Managers. Already our best selling digital product line in the higher education market these subject-specific platforms allow instructors to organize all of their course assignments and their assessments for online use by students.

Our robust new platform, which we're calling McGraw-Hill Connect, offers many more features for both faculty and students. Available initially for 12 different disciplines the McGraw-Hill Connect product line will be promoting -- be promoted with the tag line, "Connect, Learn, and Succeed." At year end we also had 741 titles live on CourseSmart -- that's the industries ebook website -- and we think the college and the university sales market could grow, oh, 3% to 4% in 2009. Historically Higher Education has been a counter-cyclical market. During economic downturns post-secondary enrollments tend to increase, as unemployed workers return to school to upgrade their skills and current students remain in school longer to become more competitive in a tight job market.

Our sales of professional books were hurt by weakness at the retail, as consumers cut back spending. In 2009 we will be launching key titles in the scientific, technical and medical market, which are less vulnerable to economic downturns than the general retail market. Our digital products and services have enjoyed solid growth in 2008, and we'll continue to build on that success in it 2009. In the first quarter we will launch three major new digital projects for professionals; JAMA Evidence, Access Anesthesiology, and Access Engineering. Very quickly on those three, JAMA Evidence, it was developed jointly with the journal of the American Medical Association. It provides subscribers with the fundamental tools for applying the medical literature to clinical diagnosis. It also includes a full text access to two of our major references; the Users Guide to Medical Literature and the newly-published Rational Clinical Examination.

Access Anesthesiology is a comprehensive online resource covering pain management, critical care, and paraoperative medicine. It takes the subscriber from the reference desk to the anesthesiologist workflow. Access Engineering features fully-searchable content from hundreds of our publications, including such classics as Perry's Chemical Engineering -- Engineers Handbook. Users can customize access engineering for their own projects and for their own individual studies. What I'm really describing are outstanding examples of a convergence, again, of content and technology. It takes knowledge, creativity and innovation to leverage our content and create such products. Professionals around the world recognize the value proposition because they require 21st-century skills to succeed. That's why our digital products are growing globally and at a very good pace. We are seeing a steady increase in new subscriptions from around the world and the renewals are strong. We also expect more growth overseas in higher education and professional markets.

The challenge in 2009 obviously will be the elementary/high school market where we now anticipate -- and we'll have to see -- but we now anticipate a 10% to 15% decline in the industry sales after a decrease of approximately 4% in 2008. It's a market in which we capture approximately 30% of available state new adoption dollars. That market topped $980 million, exceeding our earlier projections of $925 million to $950 million. In 2009 the state new adoption calendar is simply not as robust. The up-turn in state new adoptions starts in 2010, and carries into 2011. We currently estimate the 2009 state new adoption market at $675 million to $725 million, down from an earlier estimate of $850 million to $900 million. State and local budgets are obviously under pressure and funding concerns could affect the outlook in two of this year's key adoption states, California and Florida. Both states are grappling with deficits that could affect the purchase of instructional materials.

Florida has already eliminated the call for a K-12 music adoption. Only the 6-12 literature adoption will be funded this year and many districts may elect to postpone purchasing until the next year or even 2011. We just don't know. We have a strong program entered in the California K-5 reading market this year. Appropriately the program is called California Treasures. We also are very well positioned for the second year of the math adoption in California, particularly with the Los Angeles Unified School District, but here too, there is budget pressure and the situation is highly fluid. The budget pressures are also evident in our testing business. Revenue for custom contracts was off for the year and the fourth quarter as well, due to lower volume of work on several contracts and the discontinuation of two contracts that produced income in 2008. Replacing that revenue with new or expanded contract work became increasingly difficult, as state budgets tightened in the second half of the year last year.

There's some good news in testing. Despite state and district budget pressures, Acuity -- that's our formative testing program -- is adding new districts and retaining current customers. Renewals continue to be strong. We are benefiting from interest at the district level for technically-sound classroom assessments. And let's not forget that testing is still a required part of state education programs and a focus of districts seeking to move schools ahead and accurately measure achievement and growth. We anticipate that grants to states for sumtive -- that's the high-stakes end of testing under the No Child Left Behind Act -- will probably be funded at or near the 2008 level, about $410 million in the new education budget. At the end of December, 41 states and the District of Columbia reported budget deficits for their current fiscal years, which end, in most cases, June 30. Of the top 16 states in terms of instructional materials purchasing, five had already enacted mid-year cuts in their educational budgets totaling about $370 million, and cuts from additional states are expected.

On a macro level, it is not possible to quantify possible reductions in the purchasing of instruction materials based on reductions in overall education budgets because there's so many variations in funding practices across the state, but it seems prudent to assume that some budget cuts will affect purchasing by schools in the first half of 2009. There are also some concern about budgets for the fiscal year, but we are not likely to have much clarity on the 2009/2010 state education funding until May or just a little bit after that, when the spring tax revenue comes in and legislatures begin to complete budgets for the new fiscal year. A new federal education budget from the Obama administration has been promised for February. It may contain an increase in Title I grants for districts with high numbers of disadvantage students. These funds can be used for the purchase of instructional materials along with other purposes. More immediately, any funding of school infrastructure improvement included in the general economic stimulus package would benefit education and the industry indirectly by freeing up more state and local education allocations for instructional-related expenses.

This week, as we all are watching, the US House of Representatives is scheduled to vote on a stimulus bill, which sends $41 billion to local school districts. It also includes $79 billion in state fiscal relief. The effort to prevent cutbacks in key state services provides $39 billion to local school districts and public colleges and university. All told, there's $140 billion in the stimulus package for education. A stimulus bill from the Senate is in the works. It will include tax credits for tuition fees and for the first time, the purchase of course materials. Congress is on track to pass the economic stimulus package before adjoining on February 13th for President's Day. Clearly there are many developments that could influence prospects this year in the school market. We're following these developments closely and obviously we'll keep you posted of how we're seeing it. None of the current proposed stimulus is in our financials.

Let's sum up from McGraw-Hill Education. Federal funds may help alleviate pressure on state and local funding for education. A 10% to 15% decline in the elementary and high school market in 2009 and growth of 3% to 4% in the US higher education market, and for the segment a low single-digit revenue decline and a 300 to 400 basis point decline in the operating margin, excluding the 2008 restructuring charges.

And finally, now let's review the Information & Media segment. Growth in business-to-business markets and a record year of political advertising for broadcasting were key factors in this segment's performance in face of weakness for print advertising. Revenue for the Business-to-Business Group increased by 4.1% for 2008 by -- and by 0.2% in the fourth quarter. Revenue for the Broadcasting Group increased by 4% for 2008 and by 11.3% in the fourth quarter. The segment's revenue increased by 4.1% for 2008 and 1.3% in the fourth quarter. Including pretax restructuring charges of $19.2 million for a workforce reduction of approximately 210 positions and a $22.6 million decrease in incentive compensation, operating profit increased by 45% in 2008. In fourth quarter of 2008, including a pretax restructuring charge of $5.3 million for a workforce reduction of approximately 70 positions and a $6.4 million decrease in incentive compensation, the operating profit increased 61.7%. The operating margin was 8.7% for the year and 11.4% for the fourth quarter. Restructuring charges reduced the operating margin by 181 basis points for the year and 186 basis points for the fourth quarter.

Volatility in energy markets increased the demand for information, and we clearly benefited in 2008. Platt's news, pricing and conference businesses produced solid results all year. We look forward to solid results again in 2009. J.D. Power & Associates benefited from strong results in the Asia Pacific market, primarily automotive in China for the year but experienced some softness in the fourth quarter. At McGraw-Hill Construction, a gain in our project news network was upset by offset softness at [Suite] and a falloff in the media advertising, and advertising pages in BusinessWeek were down 16.1% for the year and 19.6% in the fourth quarter. Political advertising was another story. Our Broadcasting Group had a record year in political advertising with more than half of it coming in the fourth quarter. Total revenue from political advertising topped $27 million in 2008. A recessionary environment and a year without significant elections will challenge the advertising market here obviously in 2009.

Problems in the automotive market will be an issue for advertising and J.D. Power & Associates in 2009. Another factor in our revenue picture is a shift to online services at J.D. Power, which impacts the timing of revenue recognition. Bob will have a few more details on that in his presentation. So summing up for the Information & Media segment, a low single-digit decline in revenue, a 200 to 300 basis point reductions in the margin and that's excluding 2008 restructuring charges.

And therefore, summing up for the McGraw-Hill Companies, 2009 will be another challenging year. Tight credit markets, budget pressures on state and local governments will affect some spending on education and some softness in advertising. Obviously there's a great deal of uncertainty in this environment, but we're encouraged by yesterday's "USA Today's" new economic survey of 52 top economists, and prospects for the second half of this year. Growth in US GDP project resumes in the third quarter of 20009 and expands in the fourth quarter, and according to these median estimate Encouraging, but we'll have to see how the stimulus package impacts our markets -- that's hard to predict -- so we have not factored it, again, into any aspect of our forecast. At this point in the year we expect consolidated 2009 revenue to decline 1% to 2% compared to 2008, and earnings per share in a range from $2.20 to $2.30 and we'll have to see from there.

Okay. With that, let me now turn it over to Bob and Bob's going to provide a little bit more granularity about our performance and some of the key assumptions underpinning our guidance that are baked into our overall plans in terms of budget considerations for 2009. So,

Okay, thank you, Terry. I'm going to focus most of my remarks this morning on providing guidance for 2009, but before I get to this discussion I'll mention some key points as to how we finished 2008. The environment clearly continues to be challenging, but as Terry pointed out, we did achieve $2.65 per share, excluding restructuring charges, which is at the high end of our guidance. Our cash flow under our definition, which is after all investments and the dividend, came in at $455 million. Share repurchases, which mainly occurred in the earlier part of the year, settled 10.9 million shares, resulting in a cash outflow of $447 million.

Now to the fourth quarter operating performance highlights and we'll start with Financial Services. The Credit Market Services revenue declined 24.5%, as debt issuance was minimal during the difficult months of October and November. As you know, December started to show some signs of life, particularly in the US investment grade issuance. Investment Services revenue grew 7%, but clearly at a lower rate than in the first three quarters which are double digit, from the weakness that was felt in the banking and investment services sectors. The expenses continued to be prudently managed. However, fourth quarter margins at 35.5% versus 38.3% in the prior year, excluding restructuring charges, were clearly influenced by softer revenue. as Credit Market Services revenue was the small -- was the lowest of all fourth quarters for 2008.

Now for McGraw-Hill Education, Higher Education, Professional and International Group's revenue declined 2%, influenced by currency, of course. Solid performance in the US college and university market was offset by a challenging retail environment for professional, as well as weaker overseas sales, due to the strengthening dollar and weakening economic conditions in our Spanish language markets. Softness in the supplemental market and residual sales contributed to an 18.6% revenue decline at School Education Group. The 4.8% decline in expense,s excluding restructuring charges in both years, could not offset the impact of the revenue decline for the quarter. Now, for Information & Media, revenue grew 1.3%, driven by broadcasting strong political sales in their Denver market, continued growth from Platts News and pricing services. Offsetting this growth was softness in Broadcasting's local and national advertising revenue, as well as declines in advertising revenue from BusinessWeek. The expenses here were managed effectively, and coupled with revenue growth resulted in margins expanding to 13.3%, excluding restructuring charges.

There were significant restructuring actions during 2008, so I'd like to take a moment to provide an update on employee headcount. Total number of employees ending 2008 was 21,649. This reflects an increase of 478 employees compared to year-end 2007. This is net of the restructuring actions taken during the past year, and keep in mind that the most recent fourth quarter action relates to terminations that will mainly occur in 2009. The net increase in headcount is due to hiring of financial services, primarily -- particularly internationally, to support our fast-growing data and information business, as well as CRISIL's rapidly-growing ratings and equity research services outsourcing support businesses located in India. In fact, employment has grown only in our overseas markets as it declined in the US.

Now let's move to 2009, and, of course, there's a great deal of uncertainty that we're facing and this guidance will give you broad parameters on how we have built our plan. So for the Company, as Terry pointed out, we expect the revenues to decline 1% to 2%, so I'll begin with Financial Services. Our guidance of 1.5% to 2% revenue growth for Financial Services in 2009 is a blend of high single-digit growth at Investment services, with a slight decline at Credit Market services. And as you know, Credit Market Services is approximately 66% of total Financial Services revenue. Our guidance is based on current foreign exchange rate projections, which clearly influences growth as the strengthening dollar will negatively impact this growth in 2009. On a constant currency basis, revenue is projected to grow approximately 5% to 6% for the segment. Investment Services revenue is primarily billed in US dollars, so foreign exchange largely impacts Credit Market Services revenue.

Credit Market Services revenue will benefit from growth of 1% to 2% in non-transaction revenue, which is recurring in nature, such as relationship fees, surveillance fees and subscriptions, as Terry discussed. Modest price increases will help, as well. The reason we are able to forecast growth in 2009 is because certain nonrecurring items that showed significant declines in 2008, such as bank loan ratings, should not hamper us in 2009. We expect a 10% to 12% decline in transaction revenue. This is based on better comparables and some recovery in the latter part of the year following a 55% decline in 2008. While transaction revenue was particularly depressed in the fourth quarter, the month of December, as I previously indicated, showed improvement. While our projections do not anticipate any meaningful uptick in new issue volume, particularly the -- in non-investment grade issuance, we do expect that December will be a better proxy for 2009 with some potential market pickup in the second half. This should help transaction revenue.

While Investment Services fourth quarter revenue grew 7% year over year, as I mentioned earlier, it did decline sequentially compared to the third quarter. Our customer base is facing challenges and growth in index services in the quarter was hampered by significant market declines. However, ETF asset in-flows continue to grow strongly, which leaves us well positioned when the market rebounds. As a result we expect high single-digit revenue growth in 2009 for Investment Services, based on continued growth for indices, sales of new products and services -- particularly Capital IQ -- and benefits from modest price increases.

As Terry indicated, we are projecting a 250 to 300 basis point margin decline at Financial Services in 2009. This guidance implies that expenses will increase approximately 6%, for an operating margin in the range of 37.7% to 38.2%. On a constant currency basis we expect expenses to increase approximately 10%, reflecting the full-year impact of 2008 hires, particularly at Investment Services, most of whom were added overseas as I pointed out earlier, and continued investments in our fast-growing business, though at a reduced pace, as well as increased stock-based compensation. Partly offsetting these are the benefits of our restructuring actions. I'll provide more detail on the impact of incentive compensation later.

One final comment on margins. While we are projecting margin contraction at Financial Services for the full year, we do expect margins to improve from the 35.5% margin in the fourth quarter of 2008, which excludes restructuring charges. The fourth quarter's margins were depressed since it was the lowest revenue-producing quarter of the year. This is primarily driven by the fact that fourth quarter revenues, particularly transaction revenue, were depressed in light of the low debt issues, particularly in October and November. As a result, they had a more pronounced impact given the high fixed cost of the business.

I'll now turn to McGraw-Hill Education. Terry covered most of the revenue issues but there are a couple of items I'd like to address. For Higher Education, Professional and International, the US college market is expected to grow 3% to 4% and we expect to grow in line with the market. However, growth in the overall HPI Group will be negatively impacted by a very challenging professional market and the impact of the stronger dollar on overseas sales. And to underscore Terry's point about the weakening state new adoption market in 2009, I'll point out that California make up approximately one-third of the total new adoption market and this naturally bears watching. We expect a 300 to 400 basis point decline in the segment's margin for 2009. This implies a 9% to 10% margin. Expenses are expected to be roughly flat, despite plant amortization increasing $15 million and increased investments at Higher Education with its greater emphasis on digital products. This segment will benefit from restructuring actions taken in 2008, the completion of the data center moves and lower marketing costs due to reduced opportunities in the adoption markets.

For Information & Media we expect revenue to decline in the low single digits. We expect continued growth for energy information from Platts. However, this growth will not be enough to offset the loss of political advertising in a nonpolitical year, an extremely challenging advertising environment and turmoil in the automotive market. Additionally, our results for the year will be adversely impacted by a noncash accounting change at J,D. Power relating to the introduction of [Compus], a more robust reporting and analytical tool for our clients. Revenue previously recognized at the point of syndicated studies released will now be recognized ratably over a 12-month life of the subscription. Now this is similar to the [Suites] transition that we had talked about back in 2006. Now for 2009, this will result in a $15 million revenue decline and a $10 million decline in profits. This migration will also impact 2010 and 2011, but to a lesser degree. Our guidance for Information & Media's margin is a 200 to 300 basis point decline. This essentially implies a 7.5% to 8.5% margin with expense growth flat, largely due to restructuring actions taken in 2008.

Now for the impact of incentive compensation. As Terry discussed in his remarks, incentive compensation was reduced by approximately $274 million in 2008. There will be some incentives being reinstated in 2009, but in the amount of approximately $110 million, across all segments and corporate. Corporate expenses in 2009 will increase $25 million to $30 million and this largely reflects increased stock-based and short-term incentive compensation. The data center construction was largely completed and virtually all of the applications, systems and equipment migrations were finished in 2008. A little bit carried over into January. Now the irrigation costs totaled $31 million and were $10 million in the fourth quarter. McGraw-Hill Education represented about half of the migration effort in order to support their full range of digital offerings for the elementary, high school, college and professional markets. The migration effort, in fact, was completed during this past weekend and these costs are minimal in 2009.

Regarding the Company's effective tax rate we expect a lower effective tax rate for 2009. It'll be approximately 37%, which is lower than the 37.5% rate for 2008. Two changes in our business are influencing this decline. The continued higher growth in our international operations has a favorable impact on the rate. Also, we recently formed Standard & Poor's Financial Services LLC, a Delaware limited liability company. In addition to operational benefits, we expect this new structure to be more tax efficient.

Let's now review free cash flow. We continued to generate sizable free cash flow in 2008 despite a challenging environment. As you can see from the table, cash provided by operations per US GAAP was $1.2 billion for 2008. We didn't subtract the following items: Prepublication investments; purchases of property and equipment; additions to technology projects; and dividends paid to shareholders. The result is free cash flow that is available to the Company for share repurchases, acquisitions and to pay down debt. Free cash flow for 2008 was $455 million. The strengthening dollar reduced the value of our overseas cash balances by approximately $50 million and this change is reflected in our free cash flow. Based on our operating guidance for 2009, we anticipate free cash flow in a range of $430 million to $450 million. Despite our projection for lower operating results, this level of free cash flow is comparable with 2008 and is the result of easier working capital comparisons, as well as reduced investments that I'll discuss in just a moment.

An item that we have not factored into the free cash flow guidance is the potential for any pension plan contributions. The US plan is now in an under-funded position following last year's significant market declines. We continue to follow the guidance we are receiving from the government agencies regarding contribution formula changes. Based on what we are now seeing, we may have no funding requirement in 2009, or if one is required it could be in the range of $30 million to $50 million, and if it is required it would not be payable until the second half of the year.

Now, let me recap the corporation's strong financial position. On a gross basis total debt at year end was $1.27 billion. It is comprised of $1.2 billion in unsecured senior notes that we issued in 2007, as well as $70 million in commercial paper. This is offset by $472 million in cash. We did repatriate cash from overseas in the fourth quarter. However, our cash balance still consists largely of foreign cash, plus some cash held in the US for operational purposes. Our net debt at the end of December was $796 million, down from $801 million last year, virtually flat. We do not plan -- we do plan to access the commercial paper market in early 2009, as we do each year, due to the seasonal nature of our educational businesses.

As I mentioned at the start of my remarks we did repurchase 10.9 million shares in 2008, for a cost of $447.2 million, at an average price of $41.03 per share. 17.1million shares remain in the 2007 program authorized by the board of directors. Given our desire to maintain debt levels comparable to year-end 2007 we didn't make any additional share repurchases in the fourth quarter. Our diluted weighted average shares outstanding was 312.8 million in the fourth quarter, a 17.9 million share decline versus the same period last year and a 4.4 million share decline from the third quarter of 2008. The sequential decline was minimal since we did not repurchase shares in the fourth quarter. Year-end WASO, or weighted average shares outstanding, was 318.7 million shares, a 26.1 million share year-over-year decline. The figure for fully-diluted shares at the end of the year was 315 million.

Interest expense was $15.4 million in the fourth quarter compared to $12 million in the same period last year. For the full year, interest expense was $75.6 million compared to $40.6 million in 2007, and we expect 2009 to be roughly comparable to 2008. We're also focusing on our investments and our capital expenditures will decline in 2009. Prepublication investments for 2009 are expected to be $225 million versus $254 million in 2008. This lower spend level is due to reduced investment revenue opportunities in 2009, as well as prudent investments and continued offshoring benefits. Purchases of property and equipment for 2009 are projected at approximately $90 million versus $106 million in 2008. This $16 million decline is largely due to reduced technology spending.

Let's now look at some noncash items. For 2009 we expect amortization of prepublication costs to be $285 million versus $270 million in 2008. This increase reflects the higher level of investments paid in 2007 and 2008. We expect depreciation to grow to $130 million in 2009 versus $120 million in 2008. Amortization of intangibles were $17.5 million for the fourth quarter of 2008 due to the acceleration of the amortization of certain acquired intangibles. This brought the total for 2008 to $58.5 million. For 2009 we expect it to be approximately $55 million.

I'll end with a recap of growth in unearned revenue. Unearned revenue ended 2008 at $1.1 billion, which is up 1.3% from the prior year. At constant foreign currency exchange rates it actually grew 3.8%. Financial Services makes up 74% of the corporation's total unearned revenue. Financial Services unearned revenue grew 2.7%, driven by strong growth for subscription products, including Ratings Direct. At constant foreign currency exchange rates Financial Services unearned revenue increased 6.1%. For 2009 we expect low single-digit growth in unearned revenue.

Thank you and now back to Terry.

Okay, thank you, Bob, and Don, do you want to start us off?

Yes, thank you, Terry. Just a couple of instructions for our phone participants. (Operator Instructions). We're now ready for the first question.

Our first question comes from Peter Appert with Piper Jaffray. Please go ahead.

Thank you. Good morning. First question I think is for Bob. Bob, on the incentive comp decline of $274 million, can you help me understand how much of that is reversal of prior-year accruals versus the year-to-year reduction in '08 from '07?

Okay. Yes, Peter, not to get into the specifics, but -- about the specific amounts but the incentive compensation decline consists of really two components. One is lower short-term annual incentive compensation just driven by the overall performance. But also, as you point out, there is a reversal of accruals relating to our three-year grant program, which really deals with 2007 and 2006 grants, and certain accruals that we started in the beginning of the year for 2008 grants that were reversed. So there's a much larger change that occurred in 2008 than you would normally see, because it's -- so it't a combination of lower short-term incentive compensation relating to the specific year, as well as reversals of accruals that were put on the books for the three-year long-term plans in the previous couple of years.

Right. So would incentive comp in total then be a zero or a negative number in '08?

Say that. I'm not sure I understood that.

So I'm wondering if the reversal of prior-year accruals exceeded the short-term incentive comp accruals in '09?

No. Okay, no, the answer is no. There's a combination here. First of all, let's say that there are certain businesses that did achieve their targets or achieved within the bands, incentive -- short-term incentive compensation was paid for some of those businesses. In addition there is the component of the long-term incentive award that is stock-based compensation. As you know, you are recording an accrual for the stock-based compensation regardless of what happens at the end. So the answer to that is -- is there -- it would not be zero.

Okay.

I think the key point here is that, as I mentioned in my remarks there is certain accrual that we're making or planning for 2009 totaling $110 million, but that's at targets that are a bit lower than we normally would be -- than a normal year. So we're anticipating lower payouts for certain types of awards.

Okay. One more thing and then I will get off this topic. What was the actual, then, incentive comp expense item in '08?

For the whole Company.

Yes.

I don't have that number handy, Peter, but I think the easiest way to describe is for the corporate side it was zero with the exception of the accrual for stock options. For Education, it was minimal, for Information & Media, they -- certain businesses achieved their targets, and for Financial Services, there's a combination of normal short-term incentives that kick in at target and there's also the portion of a profit sharing contribution -- incentive compensation amount, which is similar to Financial Services. So there's a payout based on lower percentages. So it gives you an idea. There were certainly payouts in certain businesses, but at much lower rates --

Right.

-- than we had experienced.

Right. Okay. And then one other thing for Terry. On the S&P margins, I guess I'm somewhat surprised to see your budgeting for a 10% increase in costs next year in the context of all the staff reductions you've done. Can you help me, I guess, better understand what's driving those cost pressures?

Well, there's a number of factors there. On the S&P Investment Services side they are growing very nicely and we're continuing to invest there. We also, in terms of the non-transaction revenue, are maintaining very strong surveillance staffs on that part. And we certainly do anticipate at some point here some pick up. And so our expenses at this point are reflecting the growth on the Investment Services side as well as some of the surveillance capabilities on non-transaction revenue.

And Terry, have you rethought your expectations in terms of where you think the longer-term margins at S&P can be sustained?

Well, again, we're in the toughest period right now. I think that when we look back at some point the fourth quarter of '08 and the first quarter of '09 is going to be the bottom point. And so, again, you're dealing with a fair bit of uncertainty and talking about when new issuance volume starts to pick up and in what areas and the like. Clearly we would like to get back to a much higher level on this one. Do you have increased legal cost? Do you have increased compliance cost? The question is yes. But I defer at this point. Clearly, we'd like to get well back into the 40s on that one and we'll watch it together as we go.

Great. Thanks, Terry.

Thanks, Peter.

Thank you. Our next question comes from Craig Huber with Barclays Capital. Please go ahead.

(inaudible) of overview. My question's mainly about regulation here in the states. You mentioned, Terry, in your speech -- at the media conference earlier this year you thought the regulatory issues here in the US would drag into 2010. Could you elaborate on that further? And most importantly, what are you expecting with the new administration? [You're] a more democratic congress and obviously seems like a very tough personnel running the SEC, What sort of changes do you expect in the regulatory front for the S&P ratings business this year? Thanks.

Thanks, Craig. Craig, I -- I'm feeling more sanguine about all of that. As I told you that on the regulatory basis, I have -- risk to the business is relatively low. It is in our best interest to have very strong regulation that brings more clarity and simplifies the process, and that is something that we took on as an initiative early on in terms of the voluntary oversight frameworks in Europe, with both the commission IOSCO and Caesar, the regulators, and we were less successful in bringing that a part of the SEC. When Chairman Frank insisted upon going that direction, most of what we had gotten in those frameworks we got into the Credit Rating Agency Reform Act of the '06 and so we were pleased with that part of it.

We're going to see some here in the states and I think there's going to be a lot taking place in the first half of this year. We think that you're going to see some enhanced NRSRO rules on that one. We have -- we've already opined on them and push back. We think that they strengthen the current condition. They're not overbearing and onerous. And we think that in Europe we're going to see conclusion -- and, again, we're guessing now, but probably in the April, May timeframe that is going to be very consistent in the end with US regulatory policies. So I think it's going to bring a lot more simplicity, a lot more transparency and we're very supportive.

So I don't see an environment that is going to -- with the Obama administration that's going to be more intrusive on that one. Chairman Shapiro I think is the -- very forthright. She has a terrific track record and we look forward to working with her and the staff. Making sure that the SEC is doing really well on the regulatory front, I think, is a part of what we have to be about and we're going to do everything we can to make the regulation successful and that's where we've got to be.

And then on a totally separate matter, are you seeing anything in your transaction-based business here in the early first quarter that gives you any hope that things are turning here, particularly as you maybe look at the investment grade market for (inaudible)?

Well, I've always been more optimistic and whatever, so I better be careful here, but I really look at 2009 as a first-half, second-half year. Now I think we're going to see -- we have to see what the stimulus package does, w the effect of some of that is on the state and local government. But I think that with some of the infrastructure projects and the like, I think we're going to see some additional public financing. I think corporates and governments are going to show some pick up. The real question is going to be are we going to see any pick up in the structured area and I certainly think that some of the asset-backed (inaudible), collateralized loan obligations, some of those kind of markets are there. The question mark is in the mortgage-backed securities and it's very hard to see new growth there yet. But I think we might surprise ourselves, especially in the second half of this year.

[And then I'll turn back to my first question.] Can you just explain to us why you don't think that the SEC may look real hard at changing how you get paid on new issuance in terms of going back to how it was 30, 35 years ago when the investors used to pay for the ratings?

Yes. Well, we're going to get into that as we have in a very big way. Look, there is multiple business models that you could look. You could look at an issuer pay. You could look at an investor pay. You could look at a subscription base. You could look at a whole host of things on that. Every single business model that you come up with is going to have conflicts, or potential conflicts inherit in it and you're going to always have to have a very clear process and very compliant process to be able to deal with those kind of conflicts.

The question really ends up, as we were saying before, what is it you're trying to solve the equation for? If you're trying to solve the equation for higher transparency, which is what is foremost on everyone's mind, then the issuer pay model gets you closest to that because of the fact that the issuer pays, we disseminate all that data free of charge worldwide, and so that's where we've come down. We looked at the pros and cons of other kinds of models and we look forward to working with the SEC in addressing that. But when you take a look at the pros and cons of each of the business models, if you're solving for higher transparency it's more the issuer pay.

Now, making sure that you're managing those conflicts and that there's very clear process on that is also very, very important. And that's one of the things that -- things like some of the 27 leadership actions like the ombudsman and other kinds of things that we think is very important as part of the process so that it's very clear. But that's the approach we're taking.

Great, thank you.

Thanks, Craig.

Thank you. Our next question comes from Michael Meltz from JPMorgan. Please go ahead.

Thank you. One comment there -- and I don't know if you want to answer this or not -- but on that question, it's not quite clear to me through all of my research if the SEC even has the authority to try to change your revenue model, and that's just a comment on my part. If you want to answer it, fine; if not, that's okay. Secondly, on S&P trends, I don't know if Vicki is there or Devon, but can you talk a little bit exactly what have you seen in the past three weeks. My understanding is there's been a pick up in high-yield deals. We have seen some of these drive-by type of transactions. There's been a couple CLOs that, in fact, your comment about a slow start to '09, there has been a lot more activity of late than what we did see in Q4. And then I have a follow up.

Yes, thanks, Michael. On the SEC side, look, we are regulated by the SEC and it is in our best interest to do everything we can to make the process successful and that's what we're going to do in all of that and -- so we will have those discussions.

As part of this pick up to the beginning of the year, Michael, it is just -- there's just so much uncertainty in the air. Clearly we've seen an improvement, if you call it that, from the fourth quarter of last year. I still think that when we look back in terms of economic growth and things like that, the first quarter and the fourth quarter of last year are going to be the bottom part. It's going to be the worst. Now what we've got to see is in terms of business activity, in terms of how states are going to finance some of their issues. We've got to see where the new activity is.

So, yes, we see some spots here and there, and I think that hopefully that part will start to build, but we've got to get a little bit more evidence before we start saying that we think that in any particular category new issuance is starting to really pick up. I think we're really talking about ups and downs a little bit in the first half. I'm hopeful that by the time we get into the second half we're going to see some change, but we have to see some evidence of that.

Okay. Bob, another question for you on the incentive compensation. I just don't think I understand what your guidance implies. If the midpoint of EPS guidance is down 15% year over year and I guess you are implying EBIT declines, are you -- what are you modeling for incentive comps to increase year over year? I don't think I understand what you're saying.

Yes, the comment that I made is that incentive compensation, there's a decline -- let's work off the decline in 2008, which was $274 million. The budget calls for -- we're carrying in the budget is an increase of $110 million, which is spread across the corporation. For the most part, the incentive payments -- remember -- and I did mention on Peter's comment that there are incentive payments that occur in the Standard & Poor's business based on what is more like a profit sharing model, there is a very modest growth in that incentive pool planned for 2009. There are other areas that basically paid out nothing, [so there's summary-end] statement and there's an also -- there's also an accrual based on the long-term incentive compensation, which saw a couple of years of reversals. So net/net, there's an increase in incentive compensation across the corporation for short-term incentive compensation, as well as stock-based and long-term compensation of $110 million.

Okay. And Peter's questions, I think for us it's hard to assess what that means if we don't know the base level for '08. It would be helpful to get the number of what incentive comp was in '08 so we can truly analyze that increase. I have one follow-up question. In terms of your revenue guidance for Education. If I listen to what you're saying about HPI you're saying the college market up 3% to 4%, total HPI will be up less because of some of the other businesses there, and -- but you're pointing to total revenue for the group down just, I think, low single digits. And I think if I back into it you're saying K-12 -- or school will do better than the the -- of the 10% to 15% for the market. Am I missing something here? Can you talk a little bit more about that, please?

Well, 10% to 15%, Michael, is a pretty good spread. Again, the uncertainty levels given some of the state and local pressures is there. That's -- that was our best guess coming out of the fourth quarter on this one. We'll have to see what some of the stimulus initiatives are going to do at the state and local level and what the willingness is going to be to spend. Certainly I think education is going to be a priority for most states and obviously, $140 billion of stimulus has got to be spent somewhere and so I -- we'll see as we get into the year on this thing. But at this point I think that, to be very conservative, I think we should stay with our 10% to 15% down for K-12, and we'll see.

Okay. All right, thank you.

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

Yes, good morning. Thanks for taking the question. This past year, I think some of the margin decline was due to investment in digital products.

Hi, Catriona.

Hi. On the Education business, this past year I think some of the margin decline was due to invested in digital products and it seems that next year some of the digi -- some of the decline is really due to the fact that [LHI] is going to be weak and Education revenue is down. Can you tell us a little bit more about the margins on the digital products and how we should be thinking about the Education margin longer term.

Wow. Okay. Nobody, mostly me, is happy in the -- with the margin levels here. The push and the aggressiveness on the digital product and offerings I think is a unique opportunity that is starting to materialize in a much broader way, especially at the higher education and increasingly at K-12 and we're going to push aggressively on that and those are higher margin businesses. And we're going to work as part of some of these new initiatives too aggressive on that, and so we'll just have to keep that in front of us. But obviously we have never retreated. It's only been timing and then the turmoil of '08 and where we are in '09. But we want to get to that 20% and there is no let up on that part of it, and digital has to be a very strong component of that and that part will continue.

Can you give some color as to a percent of revenue in Education that's due to digital products?

The percentage of digital is right now very modest. In the higher education, professional side, there's a mixture. There's very little coming from our international side. Our professional publishing -- and Terry mentioned a number of product offerings there -- albeit the smallest of the three businesses, we're seeing a greater penetration of digital coming out of professional with renewal rates on that revenue up in the 90% range. So we're seeing here the signs of what we expect to see hopefully at the higher education side. The higher education penetration is very, very small at this point in time.

Okay, great, and I'll just switch gears quickly to Financial Services. Can you give us a little bit of color as to some of the areas within Credit Market Services where you saw improvement in debt issuance in December, and then specifically what did you see from mortgage-backed securities in December?

Well, the latter one is the easiest, that was very low. There's some very small activity but that is virtually flat. Where we saw some activities, obviously, is on the corporate, go -- let's see, governments, as well as some public finance on that one. As Michael had suggested as well, we saw some pickup in some issuance in terms of asset-backed securities, some collateralized loan obligations, but the structured area has been very impacted on this. We need to see some additional life to that, but at this point, corporates, public finance and governments is carrying that.

Okay, and then just a quick last question. Once we do get through this downturn in the Market what do you think the Credit Market Services can grow at on a longer-term basis?

Well, as you know from historic rates, again, if the economy is growing and the sectors are participating you're going to see obviously a return to very good growth. And I think we're in the -- closer to the ending process of unwinding some of that. We need to see the credit markets be more accommodating. As that starts to take place I think that we're going to see, certainly, a return on the high yields side, more activities on the corporates, and I think you're going to see a resumption, maybe not on the residential mortgage-backed side but on maybe the commercial mortgage-backed side and some of that activity and you're going to start to see that come again. And I'm hoping by the en -- the second half of this year.

Okay. Sorry, and I do have one more question. Just in the month of December we were seeing a little bit of issuance in Europe on the structure side, maybe not as much on the MBS side but banks were pledging and building up collateral for loans basically from the government and I'm just wondering if you saw ratings revenue from that activity?

Yes. Again, in terms of an economic environment I think the United States is probably somewhere around, I don't know, six months ahead of Europe. I think Europe has a little bit more to go in all of this and therefore, we'll be watching that kind of activity. But certainly in terms of bank loan ratings, in terms of some of the core financing there, the extent to which there's growth activities, I think that we will see that pick up, but more -- probably more slowly than we will see here.

Okay. Thanks.

Thank you. Our next question comes from Marc Sugarman with Citigroup. Please go ahead.

Yes, good after -- good morning, sorry.

Good morning, Marc.

Good morning, yes. Two quick questions on Education. The first, on college you talked about -- actually, you talked about 3% to 4% growth for College, Professional and International and you said that that was after a currency drag. I was just wondering how much of a currency impact is in that number? And could you split out college within that, as well? And then secondly, on schools, I think at the Arizona conference we hosted a couple of weeks back you were talking about the adoption market being 725 to 775, so you brought that down a little bit, which I guess is the Florida music adoption that you mentioned, but you haven't changed the overall range of schools being down 10% to 15%. I was wondering if you could just square that circle? Thanks.

Yes, thank you. I will give you the latter one and then, Bob, you can go on the currency with Education. When we were out there, again, we were -- 10% to 15% down is a pretty safe conservative view because we just don't know. We do know that, because of some of the cutbacks and some of the state views of this, especially in the open territory that there's a lot of concern and there is going to be some pullbacks. Florida and California represent almost half of the opportunities in this year's state new adoption market and K-5 math and reading are going to be very, very important. The good thing is we're very strong in both of those capabilities. So, we have to see what they're going to do in all of this. So I think it's safe to say that we brought the state new adoption number down a little bit because we have seen some cutbacks.

The bottom line is we are very uncertain as to what the stimulus is going to do at the state level. $140 billion going to the states on education is a sizable, sizable number and I don't know if that is going to have people rethink and influence. So I think at this point we need to be pretty conservative. We're looking at a big number for 2010 and 2011 now, because you're not only picking up some of the '08 and '09 cutbacks or whatever, but you're also into big, big major recycles in the business in all of that and we're investing, obviously, in that product. Sometimes these big programs are two and a half years to develop so we're in an active mode on those and getting ready for that, but we'll have to see what exactly takes place in '09. But I think staying with the 10% to 15% at this point and the state new adoption level is -- where we are is a good number.

And is your participation rate pretty much the same in '09 as '08?

Yes, we're -- again, our expectation always is that capture rates of 30% is where we need to be and if it's in a very strong reading cycle or math cycle we fully expect to do better than that.

Let me respond to your question on the higher education side. The three -- there's two parts to this. The 3% to 4% reference related to the US higher education market there's much better data to measure here, so Terry's comment focused specifically on the US higher education piece of HPI where we expect to grow in line with the market. On an overall basis for HPI where we're forecasting to be off or around 1%, currency clearly has an impact here. If you exclude the currency impact, the growth rate is in the 3% range for all of HPI.

Just one quick question. Given that December saw quite a big pick up in college, and the point that Terry made on (inaudible), the growth in the market in 2008 was 3%, I was surprised that you wouldn't expect it to be a little bit stronger in 2009?

Well, again, I'm with your sentiment. I'm hoping on this one, but I think given the uncertainty and the conditions in state tuitions and all of that, 3% to 4% is probably a good number at this point.

Thanks very much.

Thanks.

Thank you. Our next question comes from Simon Wallace with ING. Please go ahead.

Good morning, thanks for taking my questions. I've got a couple --

Good morning, Simon.

Morning. -- a couple on market share. The first is following up the last question on higher education. You're growing in '08 1% versus roughly 3% for the market, can you comment on competitive pressures from Pearson and maybe some of the other competitors like Cengage? And also on the schools market I think you're modeling about 30% capture rate for '09. Do you have an idea what your capture rate was for '08, please?

Okay. Bob, I will give you the latter one. In terms of competitive pressures on this one, it really depends on your current offering level. This was a lower year for us in terms of revision of major titles and that influenced some of the mix. From a competitive standpoint I think no change. The only thing that -- in terms of Cengage there was a very, very aggressive price increase that they put through and I think they captured a little more from that -- in all of that, but I see no significant change in that. We're going to have a bigger cycle for this year as we put out with the earnings release in terms of major title revisions, as well as some new entries. And so I think at this point the market's three to four and we look to match that and hopefully improve on that.

Are you happy with your digital product, (inaudible), is that fully competitive with some of the competitors?

Well, again, it's in different areas and Bob was talking about where we are on the professional side but the higher education side is very aggressive and you're going to see continued focus on that. College students today on average are taking one course online. We see that accelerating. We think that with the counter cyclicality in terms of some of the unemployment that you're going to see more online activity necessary and we're just continue on that path.

Okay.

Just on the comment that you raised with regard to the 2008 growth rates for higher education, again, I need to break that apart a bit. The Higher Education, Professional, International group, grew by just under 1%, it was influenced by currency. When you take currency out the overall group, which includes the US Higher Education business, Professional, and the International publishing would have grown 1.5%. Now, we look at the US higher education -- I think that was the thrust of your question, the US higher education market -- as I indicated, yes, we did not grow in it line with the market, but the growth rate there was a little under 2.5%, so figures were a little bit better than you're thinking here.

Okay. And all schools?

I'm sorry, repeat that one for me, would you?

Just to understand what you think your market share was in '08, and am I right thinking you're basing your '09 guidance on a 30% capture rate?

Well, yes. The capture rate for the new adoptions was 30%, and based on data that we have been receiving from the AAP, on an overall basis, which takes in in new account, open territory, residual sales and such, we have slightly -- from what we have -- from slightly better than the market and that is a basis for our guidance into 2009, as well. We feel we have excellent product offerings for the new adoption marketplace, and we're looking at capturing share on the other side, as well.

Great, thank you.

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

Hi, Terry. On Education, was any of the '08 strength let's spend the rest of the budget because we're not going to have anything in '09, sort of borrowing from '09, number one? Number two, would you see any change in the ordering -- timing of orders in '09 due to the budgetary pressures? Might they come earlier while schools have the money or later when they find out how much money they have?

Yes, good morning, Ed.

Good morning.

Yes, I think that you're probably going to see a little bit more of a delay. I think given the state economic conditions that they're going to be looking for the stimulus and how quickly the stimulus is going to be getting out and so I think that's going to be a little bit of a holding back. I don't think anybody is trying to borrow from one year to the next or the like. They're really trying to fully fund their requirements and they're postponing or they are splitting up into a one-year, two-year buy in certain programs. But the emphasis on this this year is a lower state adoption market than we had anticipated, in large part because of the state conditions. But California and Florida are the ones to watch and the core capabilities for this year are going to be K-5 math, K-5 reading, and 6-12 literature. And those are all areas of strength for us and so we're hoping that that's where we are going to be able to benefit.

Could you flesh out your comments on 2010 to 2011? You said recycle. Are these going to be back to the big year levels, and any major programs that are on the horizon?

Yes, we have -- because of the conditions in the latter part of '07 and certainly '08 we've seen cycles elongated here. You're running into some very core discipline programs coming up. You are talking about reading, math, social studies, you're talking about literature, all the core disciplines coming up. You're talking about state new adoption markets somewhere in the billion dollar range for 2010 and probably for 2011. So that -- and with a much improved economic condition, hopefully, and with the -- with less funding pressures I think we're going to get back to some of the -- what you would consider some of the bigger years. We'll see in all of this and there's some unknowns right now in terms o, obviously, stimulus, but we will see. But right now 2010 and 2011 are looking to be the years that we had hoped 2008 and 2009 were going to be.

Great. Thanks a lot.

Yes.

Thank you. Our next question comes from Larry Lucas with Gabelli & Co. Please go ahead.

Good morning. Thanks for taking the question. Terry, I want to come to the comments that Bob made on projecting free cash flow of around flattish, $450 million for 2009 --

Right.

-- and how do you prioritize at use of that with the stock sitting at a ten-year low and the balance sheet in awfully good shape, that under $1 billion and -- so share repurchases, the dividend payments you alluded to earlier and M&A, activity or opportunities that may come your way because of your strong financial position?

Well, Barry, good morning and thanks. But, again, uses of that free cash flow take into account exactly what you were saying across the board. I think that there are going to be acquisition opportunities. I do think there are going to be a host of portfolio considerations that could be beneficial to us. At this point we have to make sure that the organic growth stays strong and then we're investing from that standpoint. And I'm very eager to get back, as conditions improve, to a strong share repurchase program in all this. At this point we need things to settle a little bit before we do that. But organic growth, acquisition, share repurchase, just like in the better times, just the way we were performing that way, that we want to get back to that mode. But portfolio considerations are certainly on the table.

Thank you.

Thank you. Our final question comes from Michael Meltz with JPMorgan. Please go ahead.

No mas for me. I'll follow up with Don. Thank you.

Yes, thanks, Michael, on that one.

Okay. Well, if that's it, thank you all very much and we'll see as the year progresses and we certainly will be giving you everything that we have as we go, but we're hoping for a better '09. Thank you.

That completes this morning's call. The presenters slides will be available soon for downloading soon from McGraw-Hill.com and a replay of this call will be available in about two hours. On behalf of the McGraw-Hill Companies we thank you for participating and wish you a good day.