S&P Global Inc.
Q1 2007 Earnings Call Transcript

Published: 24 Apr 2007

[Operator:]

Good morning and welcome to McGraw Hill Companies first-quarter earnings conference call. At this time I would like to inform you that the call is being recorded for broadcast, and that all participants are in a listen-only mode. At the request of the company, we will open the conference to questions and answers after the presentation. Instructions will follow at that time. To enhance the call for today's participants, McGraw Hill has made the presenters' slides available on the internet. To view that, go to http

[Donald Rubin:]

Thank you, and good morning, and thank everyone from around the world for joining us today for McGraw Hill Companies’ first-quarter 2007 earnings conference call. I'm Donald Rubin, Senior Vice President for Investor Relations for the McGraw Hill Companies. With me today are Harold McGraw, Chairman, President, and CEO, and Robert J. Bahash, Executive Vice President and Chief Financial Officer of the corporation. This morning we issued a news release with our first quarter 2007 results. We trust you have all had a chance to review the release. If you need a copy of it and financial schedules, they can be downloaded at http

[Harold McGraw:]

OK, thank you Don, and good morning everyone and welcome to our review of the McGraw Hill Companies first quarter results. Joining me today is Bob Bahash, Executive Vice President and Chief Financial Officer, and we'll begin by discussing our results for the first quarter and the outlook for the rest of the year. Bob will then review our financial performance, and obviously, as always, we'll then go in any direction after that anybody would like to go. Earlier this morning we announced our first quarter results. We reported earnings per share of $0.40. That includes a $0.03 gain on the sale of a mutual fund data business in March. Revenue grew by 13.7% to $1.3 billion and margin improvement in all three segments. Historically, the first quarter is the smallest each year, but clearly we're off to very good start to achieve our goal of producing double-digit earnings growth in 2007. As we look ahead, we see that inflation is under control at 2.5%. The US Gross Domestic Product is growing at about 2.4%, and the unemployment rate is holding at about 4.4%. This makes all in all, a pretty good situation. David Weiss, the chief economist at Standard & Poor’s, was looking for a Fed rate probably going down, probably by mid year. He now thinks that's closer to the end of the year, but that the next move will still be down. Again, David Weiss our chief economist believes that the housing starts and sales are bottoming out after a 30% decline. Housing prices are down 3%, and will probably decline another 5% between now and the end of the year. Non-commercial construction is doing very well, state revenues are solid, bond rates are stable, and the Federal Reserve has held the funds rate at 5.25% since last June, and no change is expected soon. One cut to 5% again is possible by the end of the year. With that as background, let us look at our operating results. We'll begin with McGraw Hill Education. With that background, we expect Education to be an important contributor to our performance in 2007. We are encouraged by the start this year, even in a seasonally slow quarter. Revenue increased 5.6%. The operating loss was reduced by 6.6%. Costs and expenses are under tight control, and rose only about 2.7%. The higher education professional and international group revenue grew by 11.5%, to $186.9 million, and contributed 56% to the first-quarter revenue. School education group revenue was up 1.2% to $144.8 million. Let's take a closer look at those results. In the K-12 instructional market, the first quarter represents, as we all know, less than 10% of the full year. Sales in this period tend to consist largely of residual or supplemental orders, plus some early new adoptions, which may arrive toward the end of March. The pattern was skewed in the first quarter last year, because we booked 9 million in late orders from Texas for music, health, and some online programs. Obviously, this did not repeat in 2007. We closed most of the gap. A key driver was March orders from North Carolina for our K-5 music program and vocational, family, and consumer science programs for grades 6-12. More important are the earlier indicators that our newly integrated school team is performing effectively, and that the strength we expected in the state adoption market is starting to materialize. These trends take on added importance this year because we have stepped up our participation in a growing state new-adoption market. In 2006 we participated in only 80% of the state new adoption market. This year we have products for virtually the entire state new adoption market, which we expect to grow 10-15%, or between $750-800 million. As this chart shows, we believe the state new adoption market is poised for growth for the rest of the decade. It's much too soon to make predictions on our results this year. Sales campaigns are running at full throttle, but I can report that we are very pleased with the early feedback. Science in California and South Carolina, math in Texas and New Mexico, and music in North Carolina look very promising at this time. We are also encouraged by the early showing of our middle school products in the second year of the California social studies adoption taking shape in some large urban market and that would include New York City, Boston, Milwaukee and Washington D.C. We’ve already realized some substantial sales in Washington D.C. for K-5 Science and 6-12 Social Studies. We’re optimistic about our opportunities in the open territories. We’re competing with new products in K-5 Science, 6-12 Literature, and the new editions of everyday mathematics and open court reading. We are also pleased with the early showing of a new supplemental product called science snapshot. Science poses its own special challenge to elementary school teachers who typically are trained as reading specialists. Today, these teachers must help students learn the concepts and language of science so that they can score well on the new high stakes test as mandated by ‘no child left behind’. These science tests start this academic year in elementary, middle, and in high school. Preparing students for those tests is not a simple matter and when you realize that the complex concepts like photosynthesis are introduced in the curriculum as early as the third grade. To provide a classroom solution we combined video, DVDs, and print, to create a new program called ‘Science Snapshots’ for use in the third, fourth, and fifth grades. The program includes 15 hours of video, so students will have a familiar way to see and hear, as well as read about science. And once again we provide materials students can use to work independently on the computer. We believe that creating materials that address multiple learning styles of today’s students is the route to success in the classroom and to the market place. In the testing market we’ve benefited from increases in custom work for statewide assessment programs in Georgia, Colorado, Indiana, and Florida. Sales of off the shelf test products were flat in the first quarter. As I pointed out earlier, we had double digit growth in the first quarter at the higher education, professional, and international levels, and we’re quite pleased. In the U.S higher education there is a phenomenon that we call the echo effect, second semester ordering late in the year that echoes your success in the peak third quarter. When the second semester business arrives is not entirely predictable. Some years it shows up in September, other yeas it shows up in January. Our higher education group heard the echo in January. We had a very strong January and that contributed to the solid growth that we experienced with higher education products around the world in the first quarter. As you may know, we have three major imprints in this market

[Robert J. Bahash:]

Thank you Terry. We mentioned during our January conference call that we intended to purchase 15 million shares in 2007 under the share repurchase program that was approved by the board of directors in January of 2006. We elected to accelerate our program and purchase 13.2 million shares during the first quarter on a trade date basis at a total cost of $842 million. We expect to purchase the remaining 1.8 million shares during the balance of 2007. Of the $842 million total amount, approximately $231 million was settled and funded at the beginning of the second quarter. There are now remaining 6.8 million shares that are available to be purchased under the 2006 buyback program. Earlier this year the board provided additional flexibility by authorizing a new buyback program of 45 million shares. Since 1996, the corporation has returned 6.8 billion to share holders through dividend payments and share buybacks, which includes approximately $915 million returned to shareholders in the first quarter of 2007. The diluted weighted average shares outstanding for the first quarter 2007 are 361.5 million shares. That's a 15.8 million share decrease compared to the first quarter of 2006 and a 2.7 million share decrease compared to the fourth quarter of 2006. The quarter only benefited modestly from the first quarter buyback of 13.2 million shares since the bulk of the repurchases occurred near the end of the quarter. We have resumed borrowing in the commercial paper markets to fund our seasonal cash requirements and ended the first quarter in a net debt position of approximately $178 million. This compares to a net cash position of $351 million at year end 2006. And as of march 31st on a gross basis, our debt position is $607 million, which is offset by about $430 million in cash, primarily in foreign holdings. We expect to return to a net surplus cash position by the end of the year. Interest expense was $1.2 million for the first quarter. Last year we were essentially debt free in the first quarter and had net interest income of $2.5 million. Interest expense for the second quarter will increase since it will reflect commercial paper borrowings for the full quarter. For 2007, we now expect a full year interest expense to range from $24–26 million. This is higher than our previous estimate due to the timing of funding cost related to the accelerated share repurchases as well as additional interest expense resulting from the implementation of FIN 48. Now FIN 48, or FASB interpretation number 48, which is accounting for uncertainty in income taxes, became effective for the company on January 1st, 2007. GAAP based financial statements must account for taxes including an analysis of all tax positions. FIN 48 clarifies the accounting treatment of uncertain tax positions taken or expected to be taken at any income tax returns. FIN 48 also clarifies the rules regarding accruing interest on certain tax positions. We will continue to accrue interest within the interest expense category. Last year, as Terry mentioned, we transformed Sweets from real construction groups properly building products database from a primarily print catalogue to a bundle print and online service. The associated accounting change benefited year-over-year comparisons for information and media. For the first quarter 2007 the results reflect $6.5 million of revenue and $5.8 million of operating profit resulting from the sweets transformation. Let's have a look at our corporate expenses. Corporate expenses decreased $5.6 million or 13.8% in the first quarter compared to a year ago but there were several one time factors that influenced this decline. Last year's first quarter corporate expenses included a $14.8 million charge relating to the elimination of the restoration stock option program. The year-over-year comparisons are also impacted by a $4.6 million gain on the sale of an office and printing facility that also occurred in the first quarter of 2006. Categories with incorporate expense that increased are the following

[Harold McGraw:]

OK. Thanks Bob and let me go to you Don.

[Donald Rubin:]

Thank you. Just a couple of instructions for our phone participants. Please press "star one" to indicate that you wish to enter the queue and ask a question. To cancel or withdraw your question simply press "star two". If you've been listening through a speaker phone but would now like to ask a question, we ask that you lift your handset prior to pressing "star one" and remain on the handset until your question has been answered. That would ensure good sound quality for all of us. We’re now ready to take the first question.

[Operator:]

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

[Peter Appert:]

Thank you. Good morning. Terry, you cited the second quarter starting with a good pipeline at S&PND in terms of new issue volume. Could you give us any additional color on that in terms of category strength or geographic strength you’re seeing?

[Harold McGraw:]

Yeah, again it’s very appealing Peter because it’s across the board. We talked about the corporate governance side and it’s strong here mainly because of the M&A activity but also in Europe and Japan as well so that part is doing well. The structured finance market is doing exceptionally well. The only piece within that that’s off is the US residential mortgage bank market. The European residential mortgage bank market is actually doing pretty well. And that market in the United States, we predicted it to be off 10-15% and it was off 10.8% but everywhere else, the commercial mortgage bank market continues to be very very strong. It’s been strong since early 2005 and continues. You’re seeing it in the debt obligation market and you’re seeing it in the non-traditional areas as well especially in terms of the bank loan ratings areas. So it is again a very very strong pipeline and we’re very pleased with the start.

[Peter Appert:]

OK great. Thanks Terry and then one unrelated question. I was impressed you were able to post a first quarter decline in the seasonal education business. Might we read into that you’re spending less on marketing and promotion than you otherwise would have anticipated this year or is it all a function of the upside coming from the college business.

[Harold McGraw:]

Well, you’ve got both. There’s a timing issue certainly according to those expenses but also as you rightly say the higher education market was very strong. As you may recall Peter, we had a little softness in the fourth quarter last year in terms of unit sales and we think that there were some timing issues associated with that. We were really glad to see the pick up especially in early January. We were talking about that echo effect and because we thought that it should have been a little bit stronger in the fourth quarter last year and there really was a timing issue into January, but it’s strong and the professional market is also doing very well, and particularly I’m very pleased with the innovation part but as you correctly say this is, 2007 is a very important year for the education market. 2008, 2009, and 2010 are too but this is the first year of a multi-year period and with the adoption schedule so strong we really want to really be able to do a good job here.

[Peter Appert:]

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

[Harold McGraw:]

I that that probably all…and I wouldn’t want to speak for some of them but they’re probably all different reasons, but one of the things that we’ve talked about and when we’re talking about major market transformation in the educational instructional material business, you need to see some turmoil. You need to see some people deciding not that they want to make investments and play and others that want to get in. And so I think that they are all very good signals that the market transformation that we’ve been talking about is well under way.

[Peter Appert:]

OK, Thanks Terry.

[Harold McGraw:]

Thanks.

[Operator:]

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

[Lisa Monaco:]

Good morning. Terry, could you just comment a little bit, this is a bit of a follow up to Peter’s question, just on the debt issuance in the first quarter. How much of that was related to potential deals being pulled into the future March period? And then if you could just talk to the strength, the CDO market and what’s driving that and if you could just quantify what percent of the CDOs that you rate are related, are tied to RMBS in the sub prime market and given the slow down in RMBS how is the growth in CDO issue going to be resolved? Thanks..

[Harold McGraw:]

OK, thanks Lisa. Bob, did you get that last point? Between us we’ll get these. A lot of questions here. There always is timing issues, Lisa. The pipeline has been strong in ’05, ’06 and again the phones worked very hard to get it all completed but there are timing issues on that one. But again it’s just very very strong at this point. There is just no let up on that. The CDOs are very attractive because it is the instrument of choice for so many financial institutions because of all of the variability that CDOs have in terms of being able to break up into various attributes and various risk rewards capabilities and the like, and it just gives portfolio managers more flexibility to do more things in terms of the constructions of those portfolios so the CDO strength that we’re seeing now is a continuation of the attractiveness of those investments. With residential mortgage bank, the US market was down 10.8% and again the sub-prime market was down 24.4% on that part. Now, you know the thing on the sub-prime, it has gotten, in my opinion an awful lot of spotlight in the general press and I don’t think it’s as warranted or as deserved. I don’t want to understate it but you know when you're talking about an economy that’s in its sixth year of expansion, you know the Fed reserve worked hard to bring down the growth rate with the 17 rate hikes from last year. The housing sector has been most affected and therefore with the rise in those rates we have seen some faults on the sub prime (inaudible. Yes, there were some lenders that were way too aggressive and that is why over a year ago, S&P changed some of the lost coverage criteria for those lenders and put those into effect such that it reflected the fact that some of these lenders were too aggressive. Of the outstanding mortgage loan volume sub-prime is about 13% of that market and yes, I think the housing market slump has bottomed (inaudible) that one in terms of sales and new start, but we will see throughout the year certain defaults on some of the sub-prime loans, but it won’t have a material impact in our opinion, on our results. So we just think that these are in the housing sector, these excesses…we all know get into the market and we see that those that are least able to afford certain things, you know you’re going to see some defaults on that. Bob, you want to add anything?

[Robert J. Bahash:]

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

[Lisa Monaco:]

OK. And then just quickly on El-Hi? Terry could you just give us some adding total evidence why you feel comfortable with the 10-15% growth in the new adoption markets you cited early indications from some of the large states. What specifically are those early indicators? Thanks.

[Harold McGraw:]

Well, again, I gave you some of the heads-up in some of the areas

[Lisa Monaco:]

Great, thank you.

[Operator:]

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

[Michael Meltz:]

Great, thank you. I think I have three questions on S&P. Terry, I think there was a slide where you talked about the outlook, specifically for the CDO areas, and you mentioned growth should decelerate, or might decelerate. Can you just talk a little bit though…are you still expecting revenue growth from CDO business for the rest of the year? I know it's a general question, but I think it's important. And then Bob, on the margin side, can you just talk a little bit about S&P in the accruals. Did you normalize things this quarter? Is there anything we should be aware of on the margin side? And then, last question

[Harold McGraw:]

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

[Robert Bahash:]

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

[Michael Meltz:]

OK, and on that growth rate, ratings versus non-ratings?

[Robert Bahash:]

As you know, we do not break those components out. But as Terry pointed out earlier, we saw strong growth across the board in our ratings area

[Michael Meltz:]

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

[Robert Bahash:]

Well, as we're looking at the full year, I have full-year data in front of me now – again, based on external information, CDO growth in the US forecasts to be about 30% and in Europe, about 28%, so clearly very positive through the balance of the year. As Terry pointed out, we expect to grow financial services double-digit, top and bottom line, for the balance of the year.

[Michael Meltz:]

Sorry, one last clarification. Maybe it's a seasonality issue, but if you're saying +125 in the first quarter and +60 in the second, or +30 for the year, wouldn't that imply down in the second half?

[Robert Bahash:]

Well, yeah. I think the key to focus on here is that this is a very broad portfolio, and you're focusing on one particular element within the portfolio. We see significant growth in other sectors. Again, with data and information that has been growing very strong we feel very, very comfortable about our forecast for the full year. As we've pointed out earlier and as you well know, we have forecast a decline in the marketplace in 2007, and we continue to hold to that. So that is within that structured area. We do expect a decline, we expect a decline in the second half of the year. No question about it. Nevertheless, we feel very comfortable about our forecast for the balance of the year.

[Harold McGraw:]

And I would also say, Michael, that when you're talking about year-over-year, the decline of 10%-15% that we're predicting for the US residential market, it's still a sizable market. And the year-over-year comparisons obviously just get a little bit difficult.

[Michael Meltz:]

OK, thank you for your time.

[Operator:]

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

[Karl Choi:]

Hi, good morning. A quick question. I wonder if I heard it correctly, Terry, you're now expecting (inaudible) high industry growth to be 5-7% for the year, which I think is a little bit higher than 4-6% previously. I'm wondering what drove that to change? I have a follow up.

[Harold McGraw:]

OK. Again, as we go we'll give you our best thinking on that one. We see the market growing at 5-7%, and we see ourselves outperforming the market.

[Karl Choi:]

Similar question for college, given the strong start in January or in the first quarter overall, and the seasonality of the business, does a 4% growth for the industry seem a little bit conservative, given the fact that it seems like is was double digit in the first quarter?

[Harold McGraw:]

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

[Karl Choi:]

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

[Robert Bahash:]

OK, let me just look for that. I do have it. I'll have it in just a moment.

[Karl Choi:]

And lastly, Terry, you have the 20% operating margin goal for education. Is there any update on what progress you can make on improving the margins on the whole year, given the good start that you had in the first quarter?

[Harold McGraw:]

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

[Robert Bahash:]

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

[Karl Choi:]

Great. Thank you.

[Operator:]

Your next question is from Drew Crum from Stifel Nicolaus. You may ask your question.

[Drew Crum:]

Great. Thanks. Good morning everyone. Harry I was wondering if you could share with us if there was any update on the regulatory front for the credit rating business.

[Harold McGraw:]

Yeah and I'll make sure that I've got these dates right. At this point we've gone back and forth with the FCC. They're in the final stages now of developing their final positions. I believe those have to be completed by May 23rd. On that one I'll get that date exactly for you but I think they need to be completed by May 23rd for implementation in June on that part. From our standpoint, it has been a fairly good outcome. We have gotten the things that we want. There was some discussion on a couple of issues going on but the FCC is on schedule and so far we're very comfortable with the way it's working. Let me see if I've got June 26th. June 26th and I think May 23rd was the deadline for them to complete their work but they have to be implemented by June 26th on that one and we don't see any, and again all along we've been working very comfortably with them, we don't see anything that materially would effect us.

[Drew Crum:]

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

[Harold McGraw:]

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

[Drew Crum:]

OK thanks for the color, Terry. And Bob, one question for you, is there any updated guidance for free cash flow for the year?

[Robert J. Bahash:]

No, we haven't made any adjustments. We're in the range of $750–775 million. We're holding to that in this point in time. The sharing purchase activity was simply a timing issue in terms of the acceleration earlier in the year versus what we probably would have done over the balance of the year, but no impact over the $750–775 million.

[Drew Crum:]

OK. Thanks guys.

[Harold McGraw:]

Thanks Drew.

[Operator:]

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

[Frederick Searby:]

Hey thanks guys. Great quarter. Question for you Terry. Just to drill down a little bit on the margin expansion you saw at Standard & Poor’s, clearly that was extremely positive. How much is fixed cost solution? Bob you mentioned that some of it was fixed cost solution and some of it was changes. Are we seeing as you ramp up in some of these non-ratings businesses, particularly Catholic Union as actually having a meaningful impact on margins as you kind of gain scale and secondly what should be the progress there throughout the year? It sounds like you're expecting some ongoing strength in margins at Standard & Poor’s. Thank you.

[Harold McGraw:]

Yeah thanks Fred. Let me take the first whack and then follow up Bob. You're going to get margin expansion at financial services in 2007. You're not going to get a lot of contribution more than from investments like Capital IQ. Capital IQ, we are really driving hard in terms of customer penetration and market acceptance. And therefore they're in a full investment mode. We are very excited about the prospects for Captial IQ and the progress they're making. And again in terms of the overarching strength the margin expansion is coming from a higher level of efficiency and the robust growth. We expect for 2007, quite frankly in terms of our own plans going forward, it's to continue to see margin expansion on S&P. So I think the guidance I would give you is that we're definitely going to do better than 2006 and let's see how the year starts to unfold where we are. But $477 million for the first quarter includes that $17.3 million gain on that mutual fund gain but still it's showing good growth and we expect as Bob said to show double digit top to bottom and margin expansion in the remainder of the year. Bob do you want to add anything?

[Robert J. Bahash:]

Yeah. Fred, the margin improvements came really across the board with regard to our various products and services whether it's in ratings, data information portfolio services, and performance evaluation side. So we're seeing very very good performance across the board with very prudent expense management. As Terry pointed out, we're allocating resources, we're allocating our expenditures for those particular growth areas where we have an opportunity to significantly expand platforms and we're going to continue to do that and at the same time looking prudently at managing cost in other areas. So we have very solid performance on the revenue side and very prudent management on the cost side.

[Harold McGraw:]

One of the areas, Fred, that we institutionalized throughout the corporation last year, and it was a consolidated business process management function, there's a business process operation in each of the segments and corporate. And they're all coordinated but they all have a number of projects that they're working on therefore when we start talking about efficiency and process improvement we expect to see more and more based on those kinds of initiatives.

[Frederick Searby:]

Just this one follow-up

[Harold McGraw:]

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

[Frederick Searby:]

Alright thanks.

[Operator:]

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

[Brandon Dobell:]

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

[Harold McGraw:]

Bob's got some specific numbers for you Brandon. But remember you have 154% now as a Q1 over Q1 growth rate and the other numbers that Bob was giving you were the same. And the market strong and will be strong and we're going to be participating right along with it. Bob you want to get the specific number on that?

[Robert J. Bahash:]

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

[Brandon Dobell:]

OK. I appreciate the clarification. That's great help. And you guys have a more diverse portfolio than I think people realize sometimes. In the education space, as you look forward over the '07, '08, '09 timeframe you gave some color about what percentage the adoption market you expect to compete in this year. Should we anticipate that the '08 – '09 timeframe that you guys also go after that much of the adoption market or is it materially different in those two years that your portfolio fits better this year than it might in '09 let's say?

[Harold McGraw:]

No that's certainly the game plan, Brandon. When you start talking about '08 and we're into '08 product now and you know '08 and '09 you still got very big in a state and very big disciplines. This year you've got California K-12 science. In '08 you've got California K-12 math. And then in '09 you're going to have California K-12 reading and literature so those are big. Florida not only do you have the Help the World Languages for this year, in a way you've got K-12 reading and reading intervention which will be big and in '09 you're going to have 6-12 literature in Florida and so forth. So the plan with this kind of major adoptions and especially with the reading, math, and the science, you can count that we are going to be looking to participate in all of those.

[Brandon Dobell:]

OK, great, thank a lot.

[Harold McGraw:]

Thanks.

[Operator:]

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