Page 1. Robert Bahash Executive Vice President and CFO The McGraw-Hill Companies. MHP s total return outperformed S&P 500 for a decade

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1 Robert Bahash Executive Vice President and CFO The McGraw-Hill Companies Presented at the Merrill Lynch Advertising/Marketing Services, Education & Information Services Conference March 1, Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995 MHP s total return outperformed S&P 500 for a decade 3 This presentation includes certain forward-looking statements about the Company s businesses, new products, sales, expenses, cash flows and operating and capital requirements. Such forward-looking statements include, but are not limited to: the strength and sustainability of the U.S. and global economy; Educational Publishing s level of success in 2006 adoptions and open territory sales and enrollment and demographic trends; the level of educational funding; the level of education investments; the strength of Higher Education, Professional and International publishing markets; the level of interest rates and the strength of profit levels and the capital markets in the U.S. and abroad; the level of success of new product development and global expansion and strength of U.S. and international markets; the demand and market for debt ratings, including mortgage and asset-backed securities; the regulatory environment affecting Standard & Poor s; the strength of the U.S. and international advertising markets; the volatility of the energy marketplace; the contract value of public works, manufacturing and single-family unit construction; the level of political advertising; and the level of future cash flow, debt levels, product-related manufacturing expenses, pension expense, distribution expenses, postal rates, amortization and depreciation expense, income tax rates, capital, technology and other expenditures and prepublication cost investment. Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, worldwide economic, financial, political and regulatory conditions; currency and foreign exchange volatility; the health of capital and equity markets, including future interest rate changes; the implementation of an expanded regulatory scheme affecting Standard & Poor s ratings and services; the level of funding in the education market (both domestically and internationally); the state of the economy and in advertising; continued investment by the construction, computer and aviation industries; the successful marketing of new products, and the effect of competitive products and pricing. 4 Total Return (% Percent) Year 5 Year 10 Year 2005 MHP S&P Committed to advancing total shareholder value Stepped up share buy backs Investing for future while balancing our commitment to return capital to our shareholders $ in Millions $1,000 $800 $600 $400 $638 $462 $375 $380 $423 $361 $387 $394 $306 $ : Acquired 14.3 million shares at cost of $671.9 million Returned $924 million to shareholders in 2005 Since 1996 returned more than $4.1 billion to shareholders through share repurchases and dividends 5 $200 $0 $19 $ Investments Acquisitions Cash to Shareholders 6 Page 1

2 10% increase in annual cash dividend and new share repurchase program January 2006: Board approved new stock repurchase program of 45 million shares, or 12.1% of outstanding shares Dividend has been increased for 33 consecutive years Represents 10.3% average compound growth rate since share buyback goal Acquire as many as 18.4 million shares 3.4 million shares remaining in 2003 program Up to 15 million from newly-authorized program 7 8 Facing a new era of competition Faster paced More global Increasingly volatile Firms must find new ways to differentiate and create value while relentlessly reducing costs Increasing need for market insights, transparency, intelligence, and continuing education as world evolves to knowledge economy Foundation of our success: Anticipating and capitalizing on trends New opportunities to provide our customers increasingly interactive products and services Creating new economies of scale and substantially improving our operational efficiency Building content once to feed broad array of distribution and access mechanisms New models for interactive learning, networking, and research use the same content 9 10 Foundation of our success: Anticipating and capitalizing on trends Expanding content to include more proprietary, higher value-added enabling information, analytics, and tools Using digital networks to lower distribution costs Serving global communities at lower costs Growing revenue and reducing costs Fostering collaboration across operations to create: Productivity improvements New revenue opportunities Leveraging our global telecommunications network New technology will produce 40% increase in network performance Scale and knowledge key to working successfully with vendors Page 2

3 Improving performance by increasing operating leverage McGraw-Hill s global resource management program helps each of our businesses: Identify and adjust to changing customer needs Install new global business models Optimize execution for strong operational leverage Strengthen our shared services capabilities Changing how we create products New electronic workflow management system and new tools Strengthen transparency and control over one of company s largest expense categories Utilize world-class partners to improve quality, speed, and efficiency of our execution We will realize savings this year and even more starting in Changing how we create products Technology facilitates collaboration with off-shore vendors Optimizing how we communicate with vendors Time and geography no longer barriers to effective global partnerships Stepped up efforts in 2005 to expand global network for print vendors to provide us with: Priority service Improved global capacity Among the lowest prices available in marketplace Creating sophisticated digital infrastructure for the enterprise Adobe Indesign Adobe Illustrator Adobe Photoshop Adobe InCopy K4 Traffic Management ipub Outlook for 2006 We will follow our usual seasonal pattern Second half more important than first half First quarter contributes little to total performance Early signs for 2006 are encouraging Page 3

4 Outlook for 2006 Financial Services Started 2006 with a good pipeline Seeing good activity in U.S. and overseas Structured finance continues to look very good Strength in products and services not linked to new issuance McGraw-Hill Education Early days, not much visibility Outlook for Outlook for 2006 Information and Media Seeing better results in advertising markets Broadcasting is pacing 17.6% ahead of last year Benefiting from ABC s airing of SuperBowl and local-time advertising sales BusinessWeek s global edition ad pages are up 11.4% after eight issues this year Guidance for 2006 unchanged Expect 2006 diluted earnings per share of $2.36 to $2.41, excluding expensing of stock options Expect to resume double-digit earnings growth in Henry Hirschberg President, McGraw-Hill Education The McGraw-Hill Companies Global opportunities in education Key drivers for steadily improving progress We live in a knowledge economy Education: Gateway to a better life Building a skilled workforce is key to competitiveness Education is the prime product in a knowledge economy New impetus from convergence of content and technology Page 4

5 Opportunities in higher education A big and growing worldwide marketplace 90 million students 20,000 colleges and universities Emerging economies will drive enrollments China, India, Brazil, and Mexico will drive enrollments to nearly 300 million by 2025 U.S. higher education system remains leading model and source of content Elementary-high school opportunities U.S. business influenced by many of same key global trends Favorable demographics Growing enrollments No Child Left Behind Act provides greater emphasis on improving education in U.S U.S. can t waste human capital if it hopes to compete in world economy Recognition has created new focus on: Early childhood education Improving graduation rates and reducing the drop out rate More accountability through testing Greater emphasis on reading and math Greater use of technology in classroom Individualize instruction Improving the learning experience Training the teacher : An outstanding year in education El-hi market grew by 10.5% according to AAP McGraw-Hill School Education grew by 18.5% 2006 will be softer year because of decline in state new adoption market Industry will be flat to down 4% 2007 market snaps back and climbs through end of decade 2006: More investments for new opportunities Adding to spectrum of products in K-12 reading market 29 Ramping up for bigger opportunities during rest of decade Bring new solutions to the marketplace Increase our market penetration Improve our competitive position in disciplines with biggest opportunities Introducing new products focused on opportunities in open territories Real Jamestown Navigator Treasures 30 Literacy-Based Breakthrough to Literacy Wright Group Core Literacy Macmillan Treasures Balanced Basal Glencoe High School Glencoe Middle School Macmillan Treasure Chest for ELL Macmillan Leveled Readers Program Macmillan Triumphs (Intervention) Programs in bold are new or major revisions for Jamestown Signature Skills-Based Open Court Direct Instruction Jamestown Navigator (Intervention) Page 5

6 31 Growing with prek 5 Adding to spectrum of products in prek 12 math market Reform-Based Everyday K 6 Scape 6 8 Core Plus 9 12 UCSMP 6 12 Impact 6 8 Macmillan prek 6 Balanced Basal Programs in bold are new or major revisions for Glencoe 6 12 Intervention 1 12 Matters 9 11 Skills-Based SRA Real K 6 Connecting Concepts K 8 SRA Number Worlds prek 6 32 Impact of new annual mandatory testing requirements Stimulated revenue growth Put pressure on margins in testing business More customization for meeting state standards Reduced purchasing of more profitable off-the-shelf tests Our response: Re-engineering our processes Investing in technological solutions to improve productivity Shifting resources to provide services closer to the customer Impact of new annual mandatory testing requirements Grow Network study guide is defining a new market opportunity What Grow s personalized study guides do: Transform test data into actionable information Improve student performance and classroom instruction Contributed to increase in number of students passing exit exams in Texas and Arizona 24 states now require exit exams to get high school diploma Using technology to create competitive advantage Stimulated growth by solving problem for premed, nursing and allied health students in higher education market Anatomy & Physiology Revealed Experience a human anatomy lab without the costs of implementing real human dissection Serves one of the fastest growing course markets in the U.S Anatomy & Physiology Revealed [video] Using technology to create competitive advantage Using technology to create new products and services not possible in print Creating subscription-based business model that will produce more incremental revenue Page 6

7 Changing how we produce products to improve efficiency and productivity Managing our workflow electronically Repurposing information from content repositories Integrating our supply chain management Prospects in education are bright Changing dynamics of marketplace Our goals are ambitious and achievable Technology is key to achieving our goals on a global scale Greater productivity More effective delivery of content Stronger bottom line Page 7