Scholastic Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic Report's Q2 fiscal year 2021 results call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. It is now my pleasure to introduce Senior Vice President, Treasurer, Head of Investor Relations, Gil Dickoff.

Thank you, Andrew, and good afternoon, everyone. Welcome to Scholastic's Fiscal 2021 Second 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 IR website at 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 8K, 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.

Dick Robinson Good afternoon, and thank you for joining our call. In the second quarter, schools opened late, and only one-third of U.S. schools were operating with in-person learning. As they met the continuing challenges of keeping students safe, almost all schools struggled with schedule changes and different modes of learning. This substantially affected our ability to run our iconic in-person book fairs, and we took action to preserve profitability and liquidity while also supporting our customers as they navigate the pandemic. I'm proud of the way our company has adapted to the continuing issues with COVID-19, which have affected our school-based businesses. With resilience and urgency, we found new ways of reaching customers at school and at home and finding new sources of revenue, while we reduced costs throughout the company to protect our operating income and cash. First, as most schools were not yet ready to commit to hold in-person fairs in the second quarter, we did not see fair sales increase at the end of the quarter. Our customers tell us that they are eager to host fairs, and they expect to do so as soon as more children attend school in person and schools operate more normally. We are cautiously optimistic that with a push to return to in-person learning in 2021, fall 2021, and into the future in 21, and as health conditions improve into our society overall, we will be able to improve Ferris' performance in the spring season, our fiscal fourth quarter. At the same time, Schools and parents are relying on us for reading and instructional materials as they grapple with reversing the COVID slide, and our role as their trusted partner in literacy is deepening. Our trade and education businesses are thriving, driven by our best-selling books and our reading packs, workbooks, and digital subscriptions. After a slow start due to delayed school openings, Our clubs business is on track, and we are seeing momentum in our international business, largely from sales gains and trade publishing in the UK, Canada, and Australia. Finally, we're reducing operating costs and streamlining our operational structure, including significantly cutting SG&A expenses. We are seeing ongoing improvements from our $100 million investment a $100 million labor cost savings program implemented in the first quarter with benefits continuing through the second quarter and subsequent periods. Because we expected substantially reduced revenues in the second quarter, we also took additional cost-saving actions in that quarter, especially in the fares business. In summary, we were able to lessen the bottom-line impact of the revenue declines in fares with strong performance in our trade, education, and international businesses and our rigorous cost reductions. As a result of these factors, second quarter revenue was $406.2 million, a decrease of 32% compared to last year. We reduced SG&A costs by 33%. Operating income was $48.8 million compared to $105.1 million last year. We had free cash flow of $30.9 million compared to $87.7 million last year. We continue to expect improvement in the second half, especially in our important fourth quarter, but given the variables from the pandemic, we are not providing financial outlook for fiscal 2021. Turning now to our results for each segment, the children's book publishing and distribution segment revenues fell 173.3 million, or 42%, largely due to the decline in book fairs. During the quarter, thanks to our lineup of critically acclaimed titles, Trade continued to be a standout with 21% revenue growth over last year. Trade performance was driven by titles such as Dave Pilkey's Dogmen, Grime and Punishment, The Ichabod by J.K. Rowling, and All Because You Matter by Tammy Charles, as well as our many beloved series including The Bad Guys, Pig the Pug, Babysitter's Club graphic novels, and of course our Harry Potter backlist. We were proud to have Case and Calendar's King and the Dragonflies received the National Book Award for Young People's Literature, the most significant honor. We have an exciting pipeline of titles for this holiday season and into the spring, with Dave Kilkey's new graphic novel series, Cat Kid Comic Club, released on December 1, climbing Amazon's overall bestseller list right now. DreamWorks recently announced a feature film based on Dogman, which will further expand the already huge, tilky fan base of children ages 5 to 12. As we noted in September, clubs started slowly this school year due to delayed openings and significant disruption in classroom practices, and we're pleased that orders ramped up over the quarter, driven by the strong response to our ship-to-home fulfillment option. We've restructured our club's platform to operate more profitably at a lower revenue base, and this redesign is working well. Our fairs business continues to feel the impact of the virus most acutely. However, we have a number of reasons to be cautiously optimistic about this spring. More schools are committed to remaining safely open for in-person learning, especially in elementary schools. While new tools and programs do provide solutions for remote learning and hybrid instruction, Experts agree that in-person learning is far better for children in grades pre-K to six. Without in-person instruction, children are at risk of falling behind academically, causing increased educational inequities. Therefore, at the end of the fall, more schools move to in-person learning, and we expect that this trend will increase significantly in 2021. The COVID relief bill being finalized today in Congress contains federal funding for schools, which, if passed, will bring significant additional support for schools to acquire more resources for keeping schools open and safe and for helping children to learn. In addition, our customers tell us that they're eager to hold fairs, and as conditions improve, they will host scholastic book fairs because they are an essential part of school life and rewarding for both students and schools. Our fairs provide a sense of normalcy connection and joy that can help with learning and prevent reading loss. Importantly, schools also have an economic incentive to host fairs. Our fair rewards programs provide free critical resources to schools that are facing budget cuts and increased costs, and our programs allow schools to acquire the books and supplies that they need now more than ever. We have shown the ability to adjust to the new environments in schools with our flexible solutions. including in-person, online, virtual, shippable, and drive-through fare formats, as well as our home delivery service for online fares. Revenue per fare was strong for the limited number of in-person fares that were held this fall, and we had an encouraging response to our new 360 walk-through virtual format for online fares. Our book fair customers tell us that our multiple format options and our customer-focused service orientation will give them the support they need to host engaging, efficient, and easy fairs as conditions permit this spring. While the COVID situation remains fluid, given the increasing confidence about in-person learning in schools, recent positive news about vaccines, including going to teachers, and promising early indicators for Q4 fair bookings, we continue to expect performance to improve in the second half of the year, driven by our anticipation of an increase in fares held in the March to May period. In education, revenue was down slightly by 3% versus last year, but operating income improved by $5.7 million over last year. Because of our newer digital subscription lines, the timing of revenue recognition has shifted as we recognize subscription revenue over the months or years of the billings instead of up front. Our digital subscription business, which includes Scholastic Literacy Pro, BookFlix, First, and Word, recorded a 30% increase in revenues and a 43% increase in digital subscription billings in the quarter. Revenues from workbooks and early readers increased in multiple sales channels, and we have a strong education segment pipeline for the second half of the fiscal year. We're also pursuing opportunities to partner with schools to help prevent the COVID slide. For example, in the LA Unified School District, We are providing and have delivered more than 1 million books to 250,000 students through our grab-and-go reading packs. And Literacy Pro is helping to mitigate the effects of school closures in the district by providing over 2,500 e-books for students to use at home. In Tennessee, we launched a public-private initiative to deliver 580,000 books to students and teachers across the state. and we have a similar program in Connecticut. We continue to expect digital engagement to drive growth in our education business over the long term as we deepen our leading position as schools' trusted professional learning partner in supporting teachers. In the international business, operating income was up despite the revenue decreases from lower book fair sales in Canada and the UK. We have improved results in Australia and New Zealand where the impact of COVID has decreased, and trade publishing was strong in all of our major international markets. In addition, we benefited from wage subsidies in Canada, the UK, and Australia. Across our entire business, we are continuing to lower costs and increase efficiency, taking major steps to reduce our operating costs, right-size our employee base, and match our inventory purchases to consumer demand. We met our $100 million cost savings target, which will continue to benefit us through the fiscal period, and identified areas for additional savings in the second half of the fiscal year, which Ken will discuss in more detail. Cost management continues to be a major focus as we lower our cost base and improve our long-term operating leverage. We are also continuing to invest in our most promising growth areas, which are all tightly linked to our position as the foremost company in supporting reading and children's literacy. We are proud to announce that Rose Ellis Mitchell is rejoining Scholastic to lead our new education solutions group, which will be comprised of the Scholastic Education and Classroom Magazine groups that have operated separately within our education segment. Rose was instrumental in building our former EdTech business, which was sold several five years ago and she will lead our efforts to deliver a clear connected vision and support for literacy instruction and reading achievement whether in print or digital form in person or virtually. Over the coming months Rose will work with Greg Worrell and Beth Bolcari to unify the education solution team under a combined structure and plan, which will become effective on June 1st, 2021. The group will be the largest supplementary publisher serving the education market and will expand our impact on schools throughout the United States, serving classroom teachers, individual schools, and school districts with differentiated marketing and sales capabilities. In addition, We have announced that Beth Bocari, currently president of our Classroom Magazines Division, will succeed Nelson Hitchcock as president international upon Nelson's retirement at the end of this year. She will work closely with division presidents in the UK, Australia, New Zealand, and Asia, as well as the Export Division, to leverage U.S. resources to support our opportunities internationally today. to expand our significant position in the global trade publishing business and to facilitate development of new digital programs for teaching English language learning, a major growth area for us, particularly in Asia. Looking ahead, though we face continued uncertainty in the third quarter, we believe we will be able to improve our operating results in the second half of the fiscal year versus the same period last year. Undoubtedly, the pandemic has put a spotlight on the importance of reading, for learning as well as for kids' social and emotional development. Educators and parents are worried about COVID slide, and we expect to continue to play a key role in helping to reverse the learning loss experienced for months away from the classroom. We see many opportunities to grow our business driven by our core expertise, which is helping kids to learn and love to read. And we know that the breadth and depth of our relationships in schools and with families will allow us to capitalize on the growth opportunities ahead. We expect that U.S. schools will likely stabilize in the early part of 2021, focusing on in-person learning in elementary schools, which will encourage our customers to expand their connection with all of our school literacy services, including book fairs, especially in the fiscal fourth quarter. With that, I will turn the call over to Ken.