標普全球 (SPGI) 2009 Q3 法說會逐字稿

Good morning and welcome to the McGraw Hill Companies third quarter 2009 earnings call. I'd like to inform you that the call is being recorded for broadcast. We will open the conference to questions and answers after the presentation. To access the Webcast and slides go to www.mcgraw-hill.com and click on the link for the earnings announcements/conference call. At the bottom of the Webcast page there are three links. Click on Windows or Real Media if you want to access the slides and audio on your computer. If you only want to view the slides and plan to remain on the phone, click the third link with the telephone icon. (Operator Instructions) I would now like to introduce Donald Rubin, Senior Vice President of Investor Relations for the McGraw Hill Companies. Sir, you may begin.

Thank you and good morning to a worldwide audience that has joined us this morning for the McGraw Hill Companies third 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, we issued a news release with our third quarter results. We trust you've all have 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. Again, that's www.mcgraw-hill.com.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-K's, 10-Q's and other periodic reports filed 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 update will last approximately an hour. After our presentation, we will open the meeting to questions. It is now my pleasure to introduce the Chairman, President and CEO of the McGraw Hill Companies, Terry McGraw.

Okay, thank you, Don and good morning everyone and welcome to our review of the third quarter earnings and the outlook for the remainder of the year. As Don mentioned, with me today is Bob Bahash, our Executive Vice President and Chief Financial Officer. We'll start today by reviewing the operating results and then, Bob will provide an in depth look at some of our key financials. After our presentations, obviously, we'll be pleased to answer any questions or take any comments that you may have about the McGraw Hill Companies. With that, let's get started.

Earlier today, we reported third quarter results. Earnings per diluted share were $1.07. Revenue in the third quarter decreased by 8.4%. We also raised earnings guidance for the year. We now expect to achieve the top end of our $2.20 to $2.25 earnings per share guidance. At the end of the second quarter, we had anticipated coming in at the lower end of that range. The new earnings per share guidance excludes second quarter restructuring charge of $0.03 , a $0.03 loss on the divestiture of Vista Research in May and a projected $0.02 gain on the sale of "BusinessWeek," which will close in the fourth quarter.

As I've said before, in this environment, management is reviewing obviously everything within the portfolio and that obviously included evaluating strategic options for "BusinessWeek." "BusinessWeek," in its 80 years with The McGraw Hill Companies, has made significant contributions to this Company but we must focus our resources on areas with the greatest opportunities for growth and that means building size and scale globally in essential markets and expanding our digital capabilities. In reaching an agreement with Bloomberg, we believe that "BusinessWeek" will continue to operate as an organization that shares-- or within an organization that shares the same high standards for editorial independence, integrity and excellence that are the hallmarks of this publication.

In looking ahead, we're encouraged by recent reports that suggest an improving economic picture. Although the recovery is still expected to be sluggish, our economists forecast GDP growth of 1.8% next year, after a decline of 2.7% in 2009 and that shows growth GDP growth in the third and the fourth quarter. Stimulus spending is helping the economy but it appears that the funds are being spent more slowly than expected. That certainly seems to be the case this year in education but we are also seeing some positive indications that Federal Reserve and Treasury programs are contributing to improvement in the credit markets.

So, let's start our review of operations and let's begin with an outlook for the financial services segment. Our expectations for a pick up in the second half of this year in financial services started to take shape in the third quarter. Improving market conditions, tighter spreads and a surge in global debt issuance are evident in our results. For the first time in two years, year-over-year quarterly revenue increased at Standard & Poor's credit market services.

The modest increase, 0.7%, reflects a 6.5% gain in transaction revenue, despite continuing softness in the structured finance market. Revenue at S&P investment services, which account for about 1/3 of the segment's top line, declined by 7.6%. For the Financial Services segment in the third quarter, revenue declined by 2.2%. Operating profit decreased by 10.1% and the operating margin was 40.2%. The results again underscore the position S&P credit market services established in global markets, with total new issuance in the third quarter growing faster in Europe, which was up 39.2%. Then, in the United States, which was up 31.4%. International revenue increased 3.3% in the third quarter or $6.7 million, despite a $7.7 million hit by foreign exchange. Foreign source revenue accounted for 49.1% of S&P credit market services revenue in the third quarter.

Growth in the United States and European corporate industrial debt issuance was a key factor in these results. In the United States, new issue dollar volume of industrials increased by 98.9% in the third quarter. In Europe, the growth was 120.1% for this same period. S&P credit market services also benefited from a 491.3% increase in high yield issuance and obviously, off a low base in the United States in the third quarter. Speculative grade issuance was up 226.2% in Europe.

Now, in debt markets, the spread or the excess interest rate over Treasury bonds is a key gating factor for issuance. As this table shows, spreads for investment and speculative grade bonds have narrowed significantly since the beginning of the year. The composite spread for investment grade at the beginning of this year was 531 basis points. By last week, it was 226 basis points. The composite spread for speculative grade bonds was 1,628 basis points last January. And by last week, it was 693 basis points. Spreads for investment and high yield issues are still above their five year moving average and may remain elevated for some time, as investors and the credit market tread cautiously through the current economic environment.

But signs of progress are unmistakable. Improving credit market conditions enabled many companies to raise cash to fund operations or to refinance current or future maturing debt. The third quarter, global volume for high yield bonds was the highest in more than a decade. Speculative grade companies with lower credit ratings were able to raise billions of dollars, as risk premiums fell dramatically from the record levels in late 2008. On aversion to equity and structured finance risk has increased investor appetite for investment grade industrial bonds. Combined with industrial companies' effort to avoid refinancing risk over the next 18 months and the lack of new money from the bank market, new issuance has taken off.

Investors have also become more comfortable buying lower rated investment grade bonds, 54% of corporate issuance in this category has been low BBB's. That's up from 28% earlier in the year. Financial institutions are continuing to deleverage balance sheets and shrink liabilities. As expected, those balance sheet constraints have reduced growth in the corporate lending by the banks but banks are becoming more comfortable in obtaining funds from each other. The key gauge of how banks assess the riskiness of lending to one another is the spread between LIBOR and the Fed's overnight rate. Recently, the spread between the three-month LIBOR and the Fed's overnight rate fell to 0.34%, which is near a pre-2007 level.

Federal actions have clearly helped the financial sector. As the slide shows, the federal programs are wide ranging. In the midst of the decline this year in the structured finance market, the asset backed securities market benefited from the TALF, the term asset-backed securities loan facility. The program stimulated issuance in a wide array of ABS asset classes, including credit cards, auto loans, auto leases and student loans. As volume picked up and spreads began to normalize, traditional real money investors have returned to the market and the use of TALF leverage has declined sharply.

The Fed continues to operate two short-term funding facilities to help stabilize the commercial paper market and the money markets, which invest heavily in asset backed commercial paper. The Fed has extended these programs to February of 2010. The US Treasury is preparing to implement the PPIP, the Public-Private Investment Partnership, which is designed to increase demand for existing legacy residential mortgage backed securities, as well as commercial mortgage backed securities. In the third quarter, the European Central Bank began to purchase euro denominated covered bonds to stimulate the residential mortgage backed securities market there. In short, there are positive signs for S&P credit market services as we head into the fourth quarter.

Clearly, comparisons will be the easiest of the year. In the fourth quarter of 2008, revenue fell 24.5%, the steepest decline of the year. In the corporate market, a combination of tight spreads, a healthy refinancing calendar, low rates and investor demand for yield should be positive for new issuance. In the municipal market, the third quarter is historically slow but state and local governments should be active in the fourth quarter, as the economic slowdown increases the need for deficit borrowing. Federal stimulus plans, including the Build American bonds, which initially got off to a very slow start, should be a positive in this market for the fourth quarter.

In the asset backed securities market, we have seen the benefits of the TALF program. Spreads remain tight and the deal flow looks positive. In the US mortgage backed securities market, activity will remain light, particularly for the commercial mortgage backed securities. In the US residential mortgage backed securities market, resecuritization of existing securities enhanced with additional credit support, the ReREMIC's, are the main source of rating activity here. But while the structured finance market continues to be challenged, the momentum in corporate issuance is expected to help produce a double digit increase in transaction revenue at S&P credit market services in the fourth quarter. Given the slow start to the year, we expect transaction revenue for the full year to show a low single digit decline.

Non-transaction revenue at S&P credit market services slipped by 1.6% or $4.9 million in the third quarter. A reduction in breakage fees and the impact of foreign exchange were the primary reasons for the decline. This remains a durable revenue stream and should finish the year with only a slight decline. Again, the primary reasons for the decline will be the reduction in breakage fees and foreign exchange. Revenue declined at S&P investment services by 7.6% in the third quarter and that reflects the divestitures of Vista Research and CRISIL's India, CRISIL's Gas Strategies Group; the expiration of the independent research settlement with the banks at the end of July and some softness in index products and services. If you exclude those divestitures, the decline would be 4.4%.

A mitigating factor is the continued growth of capital IQ products and services. Despite bank consolidations, downsizes and closures on Wall Street, capital IQ has increased its customer base this year by 7.5% to more than 2,800 customers. A reduction in trading volume of over-the-counter and exchange traded derivatives, based on S&P Indices, is a major reason for the softness in index products and services. We are encouraged by the rebound in assets under management in exchange traded funds based on S&P Indices. And as this chart illustrates, assets under management have increased sequentially since the first quarter and are now more than $17 billion higher than the year-end 2008 closing figure.

We continue to be active in this market. Five new exchange traded funds using S&P Indices were launched in the third quarter. There are now 214 exchange trade funds using S&P Indices. That's up from 189 at the end of the third quarter in 2008 and many, many more are in the pipeline. Following the expiration of contracts for independent equity research at the end of July, S&P signed signed contracts with Citibank and Morgan Stanley for continuation of stock coverage. New post-settlement business will be coming from Merrill Lynch, which recently signed a contract to integrate our stock report into research portals for their advisors and their clients.

No review of the financial services is, obviously, complete these days without comments on the regulatory and on the legal outlook. S&P credit market services are complying with new regulations, new rules and new laws. In the United States, new rules from the Securities and Exchange Commission became effective in April and in August. In September, the SEC approved additional rules requiring more disclosure of rating histories and information underlying structured finance transactions. And approved amendments to eliminate references to NRSRO ratings in certain rules and in certain forms. More new rules and proposals were issued in October. S&P will continue to work with the SEC on all of these issues.

In Europe, the European Parliament and Council, last April, approved a regulation of rating agencies. Formal approval of the legislation is expected shortly. The effective date to be in compliance is expected by mid-2010. In the next year, we also expect additional regulation of rating agencies to become effective in Japan and Australia. All these changes could affect the performance of S&P credit market services but we don't believe they will have a material adverse effect on its financial condition or its operations. In the fall or early 2010, we expect the US Congress to pass legislation on the rating agencies as part of an Omnibus Financial Reform Bill. The drafting process is underway and the situation is still fluid but we're again, we're looking for either this fall or very early into 2010.

We continue to review our concerns with decision makers in Washington and abroad. And these include making sure that we're looking at this in a beginning to end solution, so that regulations cover all aspects of capital markets to ensure effective and efficient functioning. Also, analytical independence, that's fundamental. Foster competition in the ratings industry by establishing a fair and level playing field. And this is most important, internationally consistency because ratings are issued and used globally and contribute to the global flow of capital. So, globally consistent regulation has got to be a benchmark. We think our concerns are being heard but we will continue working with policy makers, legislators and others to help restore investor confidence in ratings. In short, this is still a work in progress.

In previous discussions on legal proceedings, we have grouped lawsuits into three general categories. First of all, number one is lawsuits alleging that S&P is an underwriter or seller of securities, which they're not. Secondly, lawsuits alleging corporate statements on earnings and ratings that were misleading to so-called stock drop suits. And three, our lawsuits based on state law claims. All of these lawsuits are at relatively early stages of litigation.

In the category one area, several motions to dismiss are or will soon be fully briefed before courts. and an oral argument was held in mid-August on our motion to dismiss the case Public Employees Retirement Systems of Mississippi versus Merrill Lynch e. al. In category two, motions to dismiss have been fully briefed in each of four cases. Two of these cases have had fully brief motions to dismiss pending since May. And we're just waiting for court time to be able to get judgments there. And in category three, we are waiting for decisions on two cases, the Oddo Asset Management versus Barclays et al; and Grassi versus Moody's Investor Services et al. In two cases, our motions to dismiss have fully been briefed and argued before the court. And obviously, we're waiting for judgment there.

The Abu Dhabi case is also in this category and we continue to see somewhat mangled reports in the media on the latest decision by Judge Scheindlin. As you may recall the Judge, on September 2, dismissed 10 of the 11 claims and permitted only the claim of fraud to proceed into the next phase of this litigation. As I've pointed out in previous sessions, the court is legally required to accept, as true, all of the facts alleged by the plaintiffs in the fraud charge. That's a critical but little noted point. Judge Scheindlin had discussed some of the 10 other claims, without prejudice, that allowed the plaintiffs to replead them. They did. And on October 15, the judge dismissed those reasserted claims with prejudice, which means the plaintiffs lost their opportunity to proceed with them. And we think we're making good progress here. Overall, we continue to believe our legal risk is low.

There's so much noise in the system that I want to take a moment to make a fundamental point about some very important developments at Standard & Poor's credit market services. Next year, S&P celebrates its 150th anniversary. In its long history, S&P has achieved worldwide recognition for the value and quality of its credit ratings. To help the market analyze trillions of dollars of debt and millions of securities, S&P created a common basis for analyzing credit risk. It developed a common vocabulary for describing credit risk and it provided a simple, one-dimensional scale for measuring credit risk. It is a remarkable achievement that enables S&P to play an important and productive role in the capital formation process in global financial markets.

But we can't rest on that achievement in today's environment. To meet new market leads, to maintain a leadership position and to grow the business; S&P must find new ways to increase the value of its credit ratings for investors. That is one of the greatest lessons of this credit crisis and it is one that S&P has learned well. As investors seek more tools and analytics to assess risk more effectively, S&P is responding. In the last 18 months, S&P has taken important steps to improve ratings stability. Add value to ratings through more analysis and features. Increase comparability of ratings. Increase the transparency of its processes and add more checks and balances to the rating process. And continue to educate the market about ratings and the rating scale.

In applying the lessons of the past to improve ratings for the future, S&P starts with criteria, the framework that S&P uses to rate debt. By providing additional detail regarding rating definitions and then reassessing criteria in structured finance, we have improved the transparencies of ratings definitions and criteria. S&P has been making important qualitative and quantitative revisions to its rating criteria for collateralized debt obligations or CDO's. Also, for US residential mortgage backed securities and US commercial mortgage backed securities. Strong analytics, underlying our rating definitions and our rating criteria, are key to enhancing the comparability of ratings across sectors.

Since ratings provide a common vocabulary to describe credit risk, we pursue comparability. When ratings are more comparable, an investor can better assess credit risks across different types of bands. Our goal is to make our benchmarks more consistent and more comparable across all asset classes, geography and time. In our view, a ratings symbol over time should aim to represent approximately the same general degree of credit worthiness, whether it was for a municipal security or a corporate bond.

Credit stability is another important factor in adding value to our ratings. We want to account for the fact that some issuers may be prone to gradual decay in credit quality before they default, while others may be more vulnerable to sudden deterioration. So, last year, S&P went beyond its primary consideration of default risk to introduce explicit stability measures in its ratings criteria. With the additional stability factor, we evaluate two securities with similar default risks but will provide a lower rating if we believe one is more prone to sharp deterioration in periods of economic stress. S&P also considers other factors in its ratings, such as payment priority of an obligation following default and potential payment after default.

To increase transparency S&P now regularly provides more information about the assumption in its models, the use of "what if" scenarios and stress tests. S&P has published specific economic scenarios for each rating category that illustrate the levels of stress an instrument might withstand without defaulting. S&P has expanded and enhanced its compliance efforts, which are now headed by a Chief Compliance Officer and a team of independent compliance professionals who oversee compliance with regulatory requirements, as well as S&P policies, including policies related to managing potential conflicts of interest. A Risk Assessment Oversight Committee has been established. It assesses risk that could impact the ratings process and operates independently of the rating business.

We also have separated the quality and criteria functions from the ratings group. S&P's quality function consists of a group of experienced professionals headed by the Chief Quality Officer. They oversee the quality of S&P's processes and the consistent application of S&P's criteria. The independent criteria group, headed by S&P's Chief Criteria Officer, performs a number of key functions. Including leading S&P's efforts to develop timely, relevant, credible transparent and analytical criteria; and overseeing the periodic reviews of existing criteria in light of potentially shifting credit risk.

And finally, we continue to educate the market participants about ratings, what ratings represent, and how to use them. That undertaking includes a comprehensive report in June on understanding S&P's ratings definitions and other publications, including a "Guide To Credit Rating Essentials," which explains what credit ratings are and how they are useful to capital markets.

That brings me full circle. After nearly 150 years, S&P is still a learning institution, determined to find new ways to service capital markets more effectively. Strengthening analytics, increasing transparency and reinforcing the integrity of the ratings process are important steps that will enable S&P to enhance the value to investors of its global benchmarks for credit risk. Therefore, let me sum up for financial services for 2009. A slight decline in revenue. An operating margin decline of 175 to 200 basis points versus earlier guidance of a decline of 225 to 275 basis points. And that, of course, excludes 2008 and 2009 restructuring charge and the loss on Vista Research. The new guidance implies an operating margin of 39.5%.

Now, let's review McGraw Hill education. All year, education has been the tale of two markets and the trend continued into the seasonally important third quarter. Our third quarter results reflect both the counter cyclical growth in the US college and university market, that has been fueled by a surge in new enrollments, and a declining elementary - high school market that's grappling with budget pressures and so far, has realized only a modest benefit from federal stimulus funding. In the third quarter, for the McGraw Hill education, revenue declined 11.6%. Operating profit decreased 15.9%. The operating margin was 29.8%. Revenue for the McGraw Hill School Education Group was off 19.6%. And revenue from McGraw Hill Higher Education International and Professional declined by only 1.5%.

Reduced potential and postponed spending are key factors in the el-high market this year. In challenging circumstances, we still expect to win more than 30% of the total available dollars this year in the state new adoption market. A capture rate that will probably match our performance last year. But in 2008, the total available dollars in the state new adoption market were an estimated $980 million. In 2009, the opportunity now appears to be only $500 million to 510 million, which is down from our original forecast for the year of $550 million to 600 million. As the bar chart illustrates, the el-high market has declined all year. Only in the month of August did industry sales come close to matching last year's results.

Sales for the industry declined only 0.7% in August versus the same month last year but year-to-date, after eight months, the market was down by 21.4% and that's according to the Association of the American Publishers. We now expect the el-high market to decline by 20% to 25% this year, down from the 15% to 20% decline originally projected. District level postponements and reaction to state and local budget pressures were clearly evident in such adoption states as California, Florida, Kentucky, Oregon and Georgia. Postponements are somewhat harder to track than the open territory but it is clear that they also had a negative impact on third quarter purchasing in those states.

Sales in the non-adoption states declined by 12.7% through August year-to-date. And again, that's according to AAP statistics. Postponement severely reduced purchasing in California, which originally offered this year's biggest industry sales potential. School districts there normally have two years in which to buy new state approved programs in core subjects. And 2009 was the first year of the K-8 reading adoption and the second year of the K-8 math adoption.

As the first two quarters progressed, it became apparent that purchasing levels would fall short of historical levels. But the number of deferrals increased sharply in July following the passage of an austerity budget by the State Legislature, which also gave districts the flexibility to use their allocations from the $334 million State Instructional Materials Fund for other purposes. The legislature also suspended the requirements that districts buy new K-8 core curriculum programs within two years after their approval by the State. The result was a statewide first year reading implementation rate of about 10%, as compared to the 40% rate we had estimated in January and the 60% to 70% rate that is more typical of California in better economic times.

The deterioration in California is the primary reason for the reduction in our estimate for the total available dollars in this year's State new adoption market but heavy postponements also suggest future demand. So let's look at the situation more closely. In California, the last reading adoption took place in 2002 when our Open Court program was only one of two State approved K-5 programs. It proved to be very effective in improving student performance across a wide variety of districts and many local customers are looking forward, as funding allows, to implementing the new addition, which is called Imagine It! But California approved a broader K-5 list than the 2009 adoption and we are also competing there with a State specific addition of Treasures. And that was the program that was so successful in Florida last year. Each of our programs offers a full range of classroom resources, including Spanish and ESL ancillaries and sophisticated digital assessment tools.

With the new school year underway, greater clarity on the retention of teaching positions and some cushioning from the distribution of federal stimulus funds, a number of California districts are now considering using their State Textbook Funding for its intended purpose. Furthermore, districts eligible for incremental Title I stimulus funds can use them for new reading purchases. And here's a real paradox. Just as uncertainty drove 2009 postponements, fear of mid-year deficits, that may lead to additional cuts in educational funding, could drive purchasing in the first half of 2010. That possibility is the reason why our field personnel are seeing new adoption activity late in the season, particularly in school districts with No Child Left Behind performance issues.

In Florida, we don't see much opportunity for late ordering in the six to 12 literature market. Although, we may see some middle school activity for reading intervention materials, many educators feel that content of literature text doesn't change that much and they can get along with older books, supplemented, if necessary, with paperbacks and library books. The second year outlook for K-12 music is better. This non-core subject can be implemented during the school year and can be phased in a few grades at a time, making it a flexible purchase for districts.

In Kentucky the outlook for 2010 was promising for K-12 math because first year postponements were pushed by the State Department of Education due to funding concerns and the delayed release of new standards. McGraw Hill School Education still did brisk business in Kentucky in 2009 and should do well again next year. Oregon is another state with many first year postponements in math. McGraw Hill school education captured a solid share of available business in Oregon in 2009 and anticipates doing well in 2010 and 2011. In short, pent-up demand is certainly very real in some places but the extent to which it can drive revenue may depend on improving economic conditions. Of course, the decision to continue using older programs could also result in increased replacement sales, as existing copies become tattered and as enrollments continue to grow.

With Texas back on the adoption calendar in 2010 and Florida preparing to buy K-12 math, we still expect state new adoption market to top $950 million next year but probably won't reach the $1 billion mark. We expect to have a solid line up of products and services to compete for the state new adoption dollars in 2010. In Texas, all grades of our 6-12 literature program were recommended for the State's "conforming list" and reviews of our Imagine It! and Treasures K-5 reading programs continue to do well. Florida has not made its State approved list official yet but our math programs are being well received in districts that are already reviewing programs for next year's adoption.

With states still struggling with budget deficits, 48, the $100 billion for education, which comes from the American Recovery and Reinvestment Act of 2009, will be obviously a very important factor in 2010. Funds have been moving slowly into the pipeline, following the money down to the district level is not easy. Most of the stimulus dollars that reached their market by the third quarter appeared to have come from the IDEA Special Education Distributions. Also, Title I funds reach the market a little bit more slowly but could stimulate some fourth quarter purchasing, with more activity next spring for implementation in the fall of 2010.

The other main program is the $39.5 billion State Fiscal Stabilization Fund, which is intended to help states build deficits created in their education budgets. Some states have already received their grants and all distributions are expected to be made by the end of the year. Much of this funding has been earmarked for staff retention and professional development but some districts have indicated that they will use part of their allocations to buy instruction material. The greatest impact on the el-high market will probably occur in 2010. There are also several programs still being finalized by the US Department of Education that could offer new opportunities for providers of el-high instruction materials or assessments, beginning in 2010 but with even greater impact in the out years. These include the Race to the Top funds, which will offer $4.3 billion in competitive grants to encourage state level initiatives. And the Investing in Innovation Funds, which will offer $650 million in competitive grants to local districts and non-profit educational groups.

Finally, and perhaps more significantly for 2010, Congress is working on the fiscal year 2010 budget for the US Department of Education. As proposed by the administration in May, the budget would provide an increase of $1.3 billion or 2.8% over the current fiscal year, a figure that does not include the American Recovery and Reinvestment Act stimulus appropriations. The new budget includes important new programs that represent renewed federal support for reading, which has been sharply curtailed in recent years by Congress because of perceived problems with the Reading First program.

Federal Stimulus dollars have also contributed to the growth in enrollments this fall in US colleges and universities. The effect was more indirect because it has taken the form of higher Pell Grant scholarships and a higher tax credit that allows students or their families to deduct up to $2,500 a year for tuition and other college related costs, including course materials. And there's as separate legislation known as the Post-9/11 GI Bill that helps veterans pay for tuition, housing and course materials while they are enrolled in college. By the end of September, more than 24,000 veterans have been approved for stipends under this new bill.

For many students, the support afforded by these programs undoubtedly made a difference between enrolling or not enrolling or between attending full time or part time. In difficult economic times, the higher education market has tended to be counter cyclical. As people tend to return to school to gain new skills or remain in school because of limited employment opportunities. The confluence of federal stimulus funds and the counter cyclical trend have resulted in enrollment numbers that are easily outstripping earlier government estimates, particularly at community colleges and career schools. Although no official, fully aggregated, statistics are available, it does appear there could be close to a 10% increase in overall post-secondary enrollments this fall.

Surging enrollments clearly helps strengthen the market for higher education products, which is up 11% through August and that's according to AAP reports. McGraw Hill Higher Education experienced growth in the third quarter in all four major imprints. With our digital products growing at a double digit rate, it is also evident that the imaginative use of technology is expanding our opportunities in higher education. As this diagram illustrates, digital products, like McGraw Hill Connect, create new ways to connect with students beyond the traditional textbook.

For years, publishers have focused their sales efforts almost exclusively on instructors because they select the text for the course. They still do. And their decisions are still critical to success in higher educational publishing. But the new digital products have broadened the college market by offering optional resources for purchase by students. By focusing on the students work flow, we can provide critical course-related content that can help them master the material they need to earn good grades. It's an online market and we've been getting traction quickly.

In international markets, strong demand for higher education products was offset by softness in school and professional sales and unfavorable foreign exchange rates. In domestic professional markets, digital subscription products in science, medicine and technology continued to be a bright spot in a challenging retail environment, as booksellers reduce inventory and limit new orders.

So with that, let's sum up for McGraw Hill Education. Because of the decline in the elementary - high school market, we are reducing our revenue guidance from McGraw Hill Education. We now expect a decline of 10% to 11%. Our earlier forecast had called for 8.5% to 9.5% decline in this year. But with tight cost controls, we now expect a margin decline of just 300 to 350 basis points and that's excluding the 2008/2009 restructuring charge. The previous estimate had called for a 300 to 400 basis point decline.

Now, let's shift to information and media. In the third quarter, for this segment, revenue declined by 10.1%. Operating profit increased 29.3%, reflecting a pre-tax restructuring charge in the third quarter last year. That reduced operating profit by $13.9 million. The operating margin was 12.4%. In a non-election year, revenue at our broadcasting group declined by 23.6% in the third quarter. Decreases in advertising, declines in the automotive industry and softness in the construction market were all factors in the 8.7% revenue decline in our business-to-business group.

Ad pages in "BusinessWeek's Global Edition" declined 29.3% in the third quarter. The stand out performer continues to be Platts in the global energy market. Oil prices are approximately 50% of what they were a year ago. Such volatility in crude oil prices and other commodities continue to create demand for our data and our information services. The strength in data and information products for business-to-business markets will be key to our future development.

Let me sum up for the outlook for information and media in 2009. Revenue will decline 9% to 10% versus our previous guidance of 8% to 9%. Operating margin will decline 200 to 250 basis points versus our previous guidance of 300 to 400 basis points. And again, that's excluding 2008 and 2009 restructuring charges. Okay, that completes the review of the operations for the third quarter and how we're looking at the completion of the year.

Let's sum up the outlook for the Corporation in 2009. We now expect revenue to decline approximately 7% this year because of continued weakness in school education and advertising. We previously had forecasted a decline of 5.5% to 6.5%. With stringent cost controls, we now expect to achieve the top end of our $2.20 to $2.25 diluted earnings per share guidance for 2009. Previously, we had guided to the low end of that range. The new guidance excludes a second quarter restructuring charge of $0.03 loss on the divestiture at Vista Research and again, a projected $0.02 gain on the sale of "BusinessWeek" in the fourth quarter.

Okay. That concludes my remarks. And I think that we needed to address a number of subjects and I hope it's helpful to you. Let's now hear from Bob Bahash on some of the key financials. And then, let's go anywhere you would like to go.

Okay, thank you, Terry. This morning, I'd like to review the key factors affecting our third quarter results and our full year guidance and what it implies for the fourth quarter. I'll focus on the decrease in consolidated costs and expenses, which were down 5.4% in the third quarter or 3.8% excluding last year's restructuring charge. This decrease occurred despite the impact of incentive compensation, which increased by $68.3 million in the third quarter. I'll also focus on the influence of foreign exchange on our results, the pending "BusinessWeek" divestiture and the improved outlook for free cash flow in 2009. Let's start with a look at our costs and expenses and the impact in each segment's performance.

For McGraw Hill Education, expenses declined 9% in the third quarter, excluding the 2008 restructuring charge and were down 8.2% at constant currencies. Higher incentive compensation was more than offset by stringent expense controls, savings from previous restructuring actions, lower sales and marketing costs, and lower cost of goods sold due to the reduction in revenue. For the full year, we now expect a high single digit decline in expenses versus our previous guidance of a mid single digit decline in expenses, excluding the restructuring charges of 2008 and 2009.

For our financial services, expenses increased 5.1%, excluding the restructuring charge of 2008 and were up 7% at constant currencies. Excluding the impact of increased incentive compensation, which was most significant in this segment, expenses would have declined slightly due to continued tight cost controls and restructuring savings, as well as benefits from the divestiture of Vista Research and CRISIL's Gas Strategies Group. For the year, as Terry indicated, we now expect margins for the segment to decline 175 to 200 basis points, which implies roughly flat expenses year-over-year versus our previous guidance of a slight increase, excluding restructuring charges in both years and the loss on the divestiture of Vista in the second quarter of 2009.

Year-to-date, margins are down 240 basis points but the fourth quarter of 2008 had the lowest margins of the year because the fourth quarter revenue was depressed by low debt issuance. That had a pronounced impact on margins, given the high fixed costs of this business. With an expected double digit increase in transaction revenue, fourth quarter margins should improve, although the increase will be mitigated by increased incentive compensation.

For information and media, expenses decreased 8.6%, excluding the restructuring charges. Restructuring savings and lower cost of goods sold, due to the reduction in revenue, were key factors, partially offset by increased incentive compensation. Now, our new margin guidance implies a high single digit decline in expenses versus our previous guidance of a mid single digit decline, excluding restructuring charges in both years and the gain on the divestiture of "BusinessWeek" in the fourth quarter.

As we've indicated on previous calls, information and media's results have been affected by the non-cash accounting impact of converting studies onto Compass, J.D. Power's online reporting and analytical tool. Revenue, previously recognized at the time of our syndicated studies release, will now be recognized ratably over the 12 month life of the subscription. This is similar to the suite's transition that we mentioned to you back in 2006. For the full year, we continued to expect a $12 million decrease in revenue and $7 million decrease in profit due to the impact of Compass. For the third quarter, the Compass conversion resulted in a revenue decrease of $5.4 million and $2.6 million decrease in profits. The fourth quarter impact is expected to be minimal.

Corporate expenses in the third quarter were $27.9 million, an $18.2 million increase for the same period last year, largely due to the higher stock-based and short-term incentive compensation. We now expect full year corporate expense to increase by $20 million to $25 million, excluding the 2008 restructuring charge and that's down from our previous estimate of a $25 million to $30 million increase. This implies fourth quarter expense of $36 million to $41 million and growth is largely due to increased incentive compensation.

Clearly, changes in incentive compensation were an important factor in our results. Significant reductions in both long term and short term incentive compensation accruals, taken in the third quarter of last year, made expense comparisons extremely challenging. In total, incentive compensation increased by $68.3 million during the third quarter of this year, including a $34.7 million increase in stock-based compensation. Now, the impact of this $68.3 million increase in incentive by segment is as follows. McGraw Hill Education, $13 million. Financial services, $32.1 million. Information and media, $5.7 million. And Corporate, $17.5 million.

On our second quarter earnings call, I indicated that incentive compensation would increase by about $90 million in 2009. We now believe that the full year increase will be closer to $75 million due primarily to reductions in stock-based compensation accruals, as well as reductions in short-term accruals at McGraw Hill Education. Year-to-date, incentive compensation increased approximately $40 million, comprised of an $68 million increase in the third quarter, partially offset by the $29 million decrease in the first half of the year. We expect an increase in incentive compensation of approximately $35 million in the fourth quarter because the fourth quarter of 2008 also benefited from reduced incentive accruals, though to a lesser extent than the third quarter of last year.

Foreign exchange also continues to influence our operating results. The dramatic strengthening of the US dollar in the second half of 2008 reduced year-over-year growth in revenue by $74.6 million and expenses by $82 million in the first half of the year. This impact lessened in the third quarter as changes in currency reduced revenue growth by $21.6 million and expense growth by $15.3 million, resulting in an operating profit reduction of $6.3 million. If current foreign exchange rates hold, the situation will change in the fourth quarter. Revenue comparison in the fourth quarter will benefit from foreign exchange but expense comparisons will be negatively impacted.

And now, I'd like to update you on the pending divestiture of "BusinessWeek." On October 13, we signed an agreement to sell "BusinessWeek" to Bloomberg. We will receive $5 million in cash and Bloomberg will assume certain liabilities, including our unfulfilled subscription liabilities. The transaction is expected to close in the fourth quarter of this year. We will recognize a $9.3 million pre-tax or $5.9 million post-tax gain for approximately $0.02 per diluted share. Given the timing of the transaction, we expect minimal financial impact in 2009 from operations.

In 2010, the divestiture will reduce year-over-year revenue growth by approximately $100 million. We expect to realize savings next year of approximately $20 million to $25 million pre-tax or $0.04 to $0.05 per diluted share. This was net of the portion of allocated expenses, such as shared services and rent, that will no longer be absorbed. Savings could vary depending upon the length of the transition of services with Bloomberg, as well as the ability to consolidate or sublease space. The divestiture will reduce our dependence on advertising revenue. Following the divestiture of "BusinessWeek," advertising will represent about 2% of pro forma total revenue versus approximately 4% previously.

Let's now review the improved outlook for free cash flow. To calculate free cash flow, we start with after-tax 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. As expected, we made a pension contribution during the third quarter in the amount of $20.5 million. Despite the pension contribution and lower operating results compared to the prior year, our year-to-date free cash flow is ahead of last year by $323 million.

As discussed in our calls earlier this year, this increase is driven mainly by the significant reduction in incentive compensation payments, prudent investments, continuing focus on working capital improvements and cost containment initiatives. We continue to expect the fourth quarter to be negatively impacted by lower anticipated receipts. However, given our strong cash flow performance to date, we're raising our guidance. We now expect free cash flow for the year to be in excess of $500 million, up from our previous guidance of $430 million to $450 million.

Clearly, the Corporation's financial position remains strong. Net debt decreased by $240.5 million, down $491 million versus the second quarter and $556 million versus year-end, reflecting the strong free cash flow generation in the third quarter, which is generally our strongest cash flow quarter. On a gross basis, total debt at the end of the quarter was $1.2 billion and is comprised of long term unsecured senior notes. This was offset by $957 million in cash. There was no commercial paper outstanding at the end of the third quarter.

Interest expense was $18 million in the third quarter, a $4 million decline from the previous year. And the decline was largely driven by a reduction in interest accruals related to uncertain income tax positions. For the full year, we still expect interest expense to be roughly comparable to 2008. The Company's effective tax rate was 37.4% versus 37.1% last year. We still expect the full year 2009 tax rate to be 36.4%. Our diluted weighted average shares outstanding were 313.6 million in the third quarter, a 3.6 million share decline versus the same period last year, roughly flat compared to the second quarter of 2009. The year-over-year decrease is primarily due to 2008 share repurchases and the decline in our stock price. Fully diluted shares at the end of the quarter were approximately 314 million.

In today's challenging environment, we're continuing to manage investments prudently without negatively impacting the enterprise. Pre-publication investments were about $45 million in the third quarter, which is a decrease of $21 million compared to the third quarter of 2008. For 2009, we still expect pre-publication investments of approximately $200 million. Purchases of property and equipment were $16 million in the third quarter, compared to almost $18 million in the same period last year. We expect an uptick in CapEx in the fourth quarter, primarily related to technology spending, as well as international expansion and continue to expect approximately $75 million to $80 million for the full year.

Now, let's take a look at some non-cash items. Amortization of pre-pub costs in the third quarter was $127 million versus $125 million last year. For the full year, we continue to expect pre-pub amortization of $275 to $280 million versus $270 million in 2008. Depreciation was $26 million in the third quarter, $4 million lower than last year. We now expect full year depreciation to be approximately $120 million versus our previous forecast of approximately $130 million. Amortization of intangibles was $11 million for the third quarter of 2009 versus about $14 million for the same period last year. And for the full year, we continue to expect approximately $50 million.

I'll conclude with a comment on the growth of unearned revenue, which ended the third quarter of 2009 at $1.1 billion. That's roughly flat with the prior year and the second quarter. In constant currency, it grew 1.9% versus the prior year. At the end of the third quarter, financial services represented approximately 37% of the Corporation's total unearned revenue. Financial services unearned revenue was roughly flat versus prior year. For the full year, we still expect unearned revenue to grow slightly, excluding the impact of the divestiture of "BusinessWeek." Including the divestiture of "BusinessWeek," we expect unearned revenue to experience a slight decline for 2009.

In summary, on the last call, we promised that we would maintain stringent expense controls and we've delivered on that promise. Our cash flow generation and our strong financial position leave us well positioned for growth as we move forward. Thank you and now back to Terry.

Okay, thanks, Bob. And obviously, relative to one of the worst business environments we've all endured a year ago and coming forward, we're obviously pleased that the Company is starting to recover and some of our markets are starting to recover. We're pleased, obviously, to be improving our guidance for 2009 and obviously, the improvement in free cash flow as well. So, with that, let me turn it back to Don and we'll go in any direction you'd like.

Thank you. (Operator Instructions) We're now ready to take the first question.

Thank you. This question comes from Peter Appert from Piper Jaffray. You may ask your question.

Thanks, good morning. The question is Bob, for you. And that is, the success you've enjoyed in terms of controlling costs is very impressive. And I'm just wondering about the sustainability of these cost reductions you've implemented. Is there going to be some catch up in 2010 in terms of deferred expenses?

Peter, we have been pretty active, as you know, in trying to control our costs. There will -- if you look by segment, especially if you take a look at the education segment, part of the influence this year was lower sales and marketing costs, free-with-order costs et cetera, simply because the adoption cycle was so much lower. So as you look at an almost doubling of the adoption state opportunities next year, you'll see an increase in those costs. Also, costs of goods sold. But we will be benefiting and we are benefiting this year from previous years' restructuring actions. And we will also benefit in 2010 from the restructuring action that we took in this year in the second quarter. So, we will see some upticks, naturally, as business starts improving for us but we're going to continue to focus awfully hard on our cost and expense.

Does as your comment, Bob, suggest that margins in the education business are basically flat next year, even in the context of some recovery in revenue?

It's a little bit early to be predicting the margins but as you know, that first year in a major adoption, you have some higher costs because of sales, marketing free-with-order costs et cetera. So, they do tend to influence your overall margins.

Got it. And then, last question, can you share with us any granularity on the drivers of revenue performance in the investment services business? And specifically, what I'm wondering is that the deteriorating revenues that you've seen this year, to the extent that a lot is subscription-based revenues, does this imply that revenues remain under pressure going into 2010?

In the investment services area, we've experienced some pressure from the Index Services side, simply because of what has happened in the overall marketplace. But when you look at price volume, from the standpoint of the impact of the overall Dow and such, that has clearly influenced the size of assets under management and our fees. But on the other side, we have seen an increase, from a volume standpoint, of individuals moving more to Index Services. So, that has counter balanced, to a certain degree, the loss of revenue simply because of the rate impact. We continue to sustain marginal growth, although growth in our environment in some of our data and information products, most notably Capital IQ, which continues to grow, albeit at a much slower pace. But in this environment, showing growth is pretty darn good. And we are influenced also by the loss of revenue from some of the investment services contracts that came due this year.

Yes, and Peter, I would only add a couple things. On the education side, we're buoyed by the effect on the el-high side. Higher ed international is doing fine. On the elementary - high school side, we've got two really strong funded programs, Florida with K-12 math and Texas with K-12 literature. And we also are still waiting to see the full picture in terms of some of the $100 billion associated with the stimulus funds on that. Even with some of the cutback rate-wise on the investment services side, we added 60 new indices at S&P Index Services this year. And even with the curtailment of the settlement on the equity research side, we were very pleased that we were able to get continuing contracts with Citigroup and Morgan Stanley and the new contract with Merrill Lynch. So, I think going into 2010, we've got a pretty good picture starting to form.

And Terry, do you think we'll get some news or developments in terms of further restructuring in the info media segment before year-end?

Well, from a transaction standpoint, acquisitions, or divestitures, I wouldn't comment prematurely. But clearly, as I said and as I've discussed with you Peter, is that we've -- everything in the portfolio, obviously, is being looked at. We want to get to higher levels of growth and earnings, so we're going to be looking at everything.

This question comes from Craig Huber who is a private investor. You may ask your question.

Good morning. A few questions. Let's take them one by one if I could. I think you mentioned you have $950 million of cash on the balance sheet. I was just wondering, how much of that is tied up in your overseas operations? And what's your current thought on share repurchases, just given you bought back a few billion dollars of stock back in 2006 and 2007? But given what your stock is here, what's your current thoughts on that?

With regard to $950 million of cash, Craig, about 50% is in the US. The other 50% is spread between Europe, which is the predominant location for most of that balance of cash, as well as Asia, Latin America and some of our subsidiaries that we have less than 100% interest in.

Craig, as regards to share repurchase, as you know, we've been very strong on a share repurchase program. Obviously, given the current environment, we suspended that, at this point and we look forward to getting back to it. We need to continue to see the stability in the recovery. But given our cash flow projections now and as you said, some of the cash on the balance sheet, we'll be giving that hard consideration.

Okay. And if I could just jump over to education for a second. You talked about the adoption market,$950 million are preliminary thoughts for next year versus $500 million to $510 million this year. What is your current thought to the open territories next year? I know it's early but the percent change, potentially for next year, the open territories that are 50% of the market?

Well, Craig, obviously, in terms of open territories, they have not shown growth for a number of years now. And therefore, we'll have to see what the stimulus funds, what effect they will have on that one. It could be very good but it's guessing at this point. Clearly, you have 48 states that are now in deficit and some of the federal funds, the stimulus funds are going to have a big impact. I would have to think that there's going to be some growth on that side but we'll have to see where the stimulus money comes as we get into 2010.

And then lastly, just over in the S&P ratings. As you look at your fourth quarter for business there, what do you see for the trends for the various debt categories, that's looking better in the fourth quarter versus what you saw in the third quarter? What categories please?

Well first of all, you're seeing some very strong growth, as we were talking about, in terms of the new issuance in both in Europe and here in the United States, especially on the corporate and government side. And you're also seeing some on the municipal side. The interesting part is that as spreads narrow, we're starting to see some real pick up on the speculative side and the high yield issuance, both here and in Europe. So I think what you're going to start to see is the return to some of that kind of investments. Structured finance is going to be soft for awhile. But we're seeing, as we were saying, on the asset backed side, we're starting to see some rejuvenation there. But residential mortgage backed, with the exception of some of the ReREMIC's and the commercial mortgage backed market, will be soft into 2010. But I think, obviously, the credit markets are unthawing and we're starting to see a much brighter picture.

Are you feeling better about the syndicated bank loan market?

Better and I want to see continued activity in that market. But at this point, the pick up that we're seeing is welcome. We've got to see it continue.

Great. Thank you.

Thanks.

We will now take our final question from Michael Meltz from JPMorgan. May ask your question.

Thank you. I'll be quick here. Just two clarifications somewhat. Peter's question about investment services trajectory, I think you kind of answered this. What you were saying, assets under management tied to S&P Indices have ramped. And then, you talked about getting some new contracts. But is it fair to say you expect investment services revenue to grow next year?

Yes, definitely.

Okay. And then on "BusinessWeek," just the financial detail you gave there at the end, Bob, your estimate of $20 million to $25 million of pick up, does that have potential to go up if you're able to sublease out facilities? That number just seems low to me.

Yes, it would, Michael, if we were able to sublease our facilities. We're just looking at a pretty difficult environment in terms of space requirements here. So, we're looking at the space that "BusinessWeek" occupies currently, that we would be holding that through the balance of next year. Although, there will be a period of time during the transition services that the "BusinessWeek" people will remain in our building but that's only for a few months. If we do get an opportunity to sublease that space earlier, that would be a pick up.

Okay. And then, last question, I know you commented on education margins. On S&P margins going forward, to the extent you continue to see a pick up in transaction-oriented revenues and investment services actually starts growing, are there any factors we should think about that could mitigate margin upside going forward?

No, I think we're actually fairly pleased, given all of the things that have gone on this year, in that front. I can tell you that, now as we take a look at some of the additional administrative costs from regulation and some of those, we were thinking that it had about a 2 two percentage point margin erosion factor. We think that it's now more like 1%. And as a regulatory environment starts to abate and we get some clarity here, I think that's all for the good. And we can operate in that kind of environment in a more efficient way. So, we think that the additional costs that we want to project, are not going to be as onerous.

Can you clarify that? Is that just back of the envelope, you had thought it would be like a $40 million number and now you're saying $20 million?

No -- well, yes. Somewhere in that range, yes.

And that's from just what? More people for record keeping and compliance type efforts?

Right and that's why I went through all of the different components that we have put in place now. And we have a lot more clarity in terms of what those costs are.

Okay, all right thanks for your time. Have a good day.

Thanks Michael.

This concludes this morning's call. The presenter slides are available soon for downloading from www.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.