Scholastic Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic First Quarter Fiscal 2021 Results Conference Call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require operator assistance, please press star, then 0. I'd now like to hand the conference over to your host today, Mr. Gildikoff, Senior Vice President, Treasurer, and Head of Investor Relations. Please go ahead, sir.

Thank you, Liz, and good afternoon, everyone. Welcome to Scholastic's Fiscal 2021 First Quarter Earnings Call. Joining me on the call today are Dick Robinson, our Chairman, President, and Chief Executive Officer, and Ken Cleary, the company's Chief Financial Officer. We have posted an investor presentation on our IRR website, and investor.scholastic.com, which we encourage you to download if you have not already done so. I would like to point out that certain statements made today will be forward-looking. Such forward-looking statements are subject to various risks and uncertainties, including those arising from the continuing impact of COVID-19 on the company's business operations. These forward-looking statements, by their nature, are uncertain, and actual results may differ materially from those currently anticipated. In addition, we will be discussing some non-GAAP financial measures as defined in Regulation G, and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release filed this afternoon on a Form 8-K, which has also been posted to our investor relations website. We encourage you to review the disclaimers in our press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now I would like to turn the call over to Dick Robinson.

Good afternoon, everybody, and thank you for joining our call. As you all know from your own lives or from the news, it is a difficult time for U.S. schools, which are grappling with how best to keep their teachers, students, and communities safe, while also implementing new ways to schedule and organize learning, carry out rigorous distancing and sanitation methods, and supporting families who are navigating this new normal with them. Most schools delayed openings this academic year, and while some have started with fully remote learning models, many others have started in-person sessions or hybrid schedules. During this time of readjustment, as teachers are beginning send in book club orders and schools are just now able to schedule book fairs, we remain intently focused on both managing the effect of COVID-19 on our business and supporting our school and family customers as they acclimate to their new environment in three important ways. First, we have substantially completed our $100 million cost reduction program and our transition to a more flexible operating model. Ken Cleary will cover the program in detail, but I'll touch on the key initiatives. We took immediate action in March to reduce costs, while also developing a comprehensive program to mitigate the impact of the pandemic on our operating income and cash flow to strengthen our businesses and position Scholastic for growth in the years to come. This program reduced seasonal operating loss this quarter by $38.1 million. excluding one-time items and meaningfully lowered free cash use in the quarter. In the first quarter, most reductions were related to labor, resulting in a one-time pre-tax severance charge of $12 million. We've streamlined all of our U.S. units and particularly our club and fair organizations, significantly reducing headcount and improving efficiency. As part of these cost-focused measures, we sold our underutilized Danbury, Connecticut facility, and we continue to pursue other cost-saving actions in response to the changing circumstances of our school customers. This program is designed to enable us to reach our goals of preserving profitability and positioning ourselves to ramp operations efficiently as demand increases during the year. Longer term, we believe that our efforts will improve Scholastic's operating leverage, streamline financial processes, and significantly lower our cost base. At the same time, we're positioning the parts of our business that are less sensitive to COVID, trade and education, for continued success for the rest of the year and beyond. We're proud of our strong front list and portfolio of popular IP, and have accelerated our work to deepen our digital connections with our customers. COVID-19 has fast-tracked the digital evolution that was already underway, and our blend of traditional and digital solutions allows us to meet customer current needs and anticipate how to best solve challenges. Third, we are flexing the makeup of our products and services and the timing of delivery to meet customers where they are. Because of our transition to a more flexible model, we're able to match our offering and therefore our costs with our best revenue potential. For example, we are now giving parents and schools the choice of shipping club and fair orders to homes as well as schools, as many have requested. We've already seen a strong response to home shipments from parents ordering from book clubs. For schools operating in a tradition in-person manner, we are beginning to schedule in-person fairs for delivery later this fall. For schools that opt for online fairs, we are enhancing our model to improve revenue per virtual fair with a new animated promotion website directed virtually to parent and child customers ordering from home. Teachers and administrators are quickly settling into their new environments, and we are beginning to see momentum. Now turning to Q1 performance in more detail. Largely as a result of the challenges presented by COVID-19, Scholastic's first quarter revenue of 215.2 million was 7% lower than Q1 of last year. Excluding one-time items, the operating loss in the first quarter was 45 million, a 46% improvement from the prior year's operating loss. of $83.1 million, also excluding one-time items, due to our aggressive actions to reduce costs and transition to a more flexible and responsive model to meet new needs of schools and classrooms. In trade, in the first quarter, our strong sales continued with the ballad of Songbirds and Snakes, which, as you know, is Hunger Games number four, staying strong on bestseller lists throughout the summer. The Babysitter's Club graphics, Captain Underpants, The Bad Guys, and That Enough series all performed very well, as did You Should See Me in a Crown by best-selling author Leah Johnson, which is the first young adult novel picked by Reese Witherspoon's book club. We're also seeing more and more parents turn to our workbooks for early learners. Dave Pilkey's Dogman, Grime and Punishment, the ninth book in the series, launched on September 1, just as we entered the second quarter. This critically acclaimed book remains the number one best-selling book overall in the US, Australia, and Canada over the past several weeks and has topped every best-seller list. We are thrilled with this performance, which was exceptional in a busy summer publishing season. We are planning also for the important November release of J.K. Rowling's first new children's book in 13 years called The Ichabog, along with other exciting new releases. We are also gaining more traction for our entertainment unit based on strong demand for our characters and IP, with recent development deals for live-action feature films of Caster, Goosebumps, Animorphs, and The Magic School Bus, a famous Scholastic brand. These media deals will help to engage a new generation of fans and also pay off and a backlist boost, marketing opportunities in our school channels, and international sales lift. Fairs. In turning to clubs and fairs, what we're seeing this academic year so far is that teachers and administrators are focused on getting their in-person and remote classrooms up and running and helping students and families settle into new routines, and this has slowed down fairs bookings. We had anticipated a lower fair count this fall due to the delayed openings, and we expect the pace of club and fair activity to increase toward the end of the second quarter and in the second half of the year. We know the schools are motivated to host fairs, which are crucial fundraisers for the schools and give kids the sense of normalcy that they miss. And we've converted many physical fairs to our virtual online model. And we are working with schools to schedule safe and easy physical fairs that solve for space, time, and people limitations. These can be set up in hallways or outdoors and are easy to move from one location to another. And all fairs offer an online extension. We're also offering drive-through options in certain districts, as well as our full fare model with our strict safety precautions in place. We're seeing interest in our new shippable fare option, and we are ready to scale up as schools become ready to schedule physical fares. As schools across the country implement and adjust their learning models to accommodate local infection rates in their area or school, we can provide solutions that fit each school's individual needs. Similarly, in our clubs business, we are currently seeing significant engagement from teachers and higher revenue per event, but we are currently lagging in orders from teachers as a result of delayed openings and changes to their classroom environments. However, across the board, we're hearing that teachers, students, and families want books, and they want the kind of engaging, entertaining books that they can get from us and our clubs. We are bringing costs down by reducing SKUs and encouraging migration to our digital platform while also efficiently distributing reimagined flyers that are designed to help teachers spark discussion, teach understanding and tolerance, and engage young readers. Teachers appear to be about three weeks behind normal ordering patterns, so we expect that order volume will increase over the next several weeks but will not catch up. fully during the quarter to last year's pace. In our education business, our transition to digital is gaining traction that we expect to pay long-term dividends for our company, and we expect digital education programs to be an essential part of classroom instruction long after the pandemic is behind us. We are in a strong position as the school's trusted professional learning partner, and our summer programs perform well across the segment as we are able to provide digital print or blended solutions. We are continuing to strengthen our digital platforms as our programs become part of the school curriculum, which are the bedrock of modern education models, and digital subscription billing showed promising 15% growth in the first quarter. As is typical for digital and subscription revenue streams, we're seeing a higher steady volume of smaller transactions for our digital components. Schools look to us to help keep kids engaged and fight against the summer slide with offerings like our take-home grab-and-go reading packs, which are ordered by schools for delivery by us to children's homes. We transformed our Scholastic Lit Camp at home to digital in time for the summer, and New York City used it for its summer program for kids. The digital reading programs have resonated right away because we are offering the books kids want to read from authors they love and recognize. We had new engagement for Scholastic First and Literacy Pro, our digital independent reading tool, through a district-wide order from LAUSD serving most of the population of kids in schools in Los Angeles. We are encouraged by the response to and engagement with our innovative and award-winning digital literacy programs such as Scholastic First, and Word as well as digital companions to our classroom magazines and our recently launched digital-only classroom magazine subscription, which is very popular and has generated new sales for the education segment. To pair with successful platforms like our Scholastic Learn at Home Hub, we have launched new initiatives like Scholastic Bookshelf on Instagram. which gives parents and teachers free access to excerpts from over 60 scholastic stories accessible with a few simple swipes. In our international business, we are seeing similar trends as in the U.S. Lower book fair volumes, particularly caused by primarily caused by school closings in Australia, Canada and the UK and lower direct sales in Asia were partially offset by stronger trade publishing globally and strong book club performance in Australia. Profits grew substantially in the quarter for international. Looking ahead, we continue to believe we will improve Scholastic's operating results in the second half of our fiscal year But because of the continued uncertainty surrounding the impact of COVID, given the delayed school openings and new methods of scheduling and organizing learning, we will not be providing an outlook for fiscal year 2021. As noted, we expect club and fair sales to increase toward the end of the second fiscal quarter and to continue to strengthen in the second half of the year. We have not only completed our $100 million cost program, but we're taking additional action to lower costs and be more efficient, and this will continue to be a key focus of the company. We are also supporting our revenue streams by cementing our position as a trusted partner to our customers, providing a wide range of best-selling books, best-in-class solutions in the form of flexible school distribution channel solutions, and engaging digital education platforms and literacy solutions. This is the essence of our work, to nourish and support kids as well as their teachers and parents and schools on their personal, learning journeys through the year. As more than 55 million children return to a mixture of in-person, hybrid, and remote classrooms across the country, learning models and school needs vary from school to school and district to district. The one thing that is not wavered in this challenging time is our dedication to helping children learn and grow and our ability to deliver value to our school, teacher, parent, and child customers. This dedication has driven us every day for the past century and will continue to drive us forward for years to come. With that, I will turn the call over to Ken Cleary, our Chief Financial Officer.