Scholastic Corporation

Ladies and gentlemen, thank you for standing by, and welcome to Scholastic Third Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to Gil Deco, Senior Vice President and Treasurer. Please go ahead.

Thank you so much, Sarah, and good afternoon, everyone. Welcome to Scholastic's fiscal 2021 third quarter earnings call. Joining me today on the call 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'd 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. If you'd like to ask a question, Please send it to our IR email at investor underscore relations at scholastic.com, and we will respond within two business days. And now I'd like to turn the call over to Dick Robinson.

Good afternoon, and thank you for joining our third quarter call. We started 2021 reflecting on our roots with a segment on CBS Sunday Morning focused on how, for generations, We have inspired and supported readers through our classroom magazines, trade titles, clubs and fairs, instructional resources for schools, and more. Throughout our 100-year history, Scholastic has always been there to support educators and students as we do today, a full year since the pandemic shutdown began and schools closed throughout the United States and the globe. We are proud of our reputation and our ability to explain contemporary issues in a balanced way, to bring stories of diversity and social justice to children, and to help teachers and students learn through our magazines, books, and digital materials, not only the skills of reading and learning, but the social-emotional impact of great stories, and the ability to understand through information and nonfiction how the world works and how we operate our democratic system. All this is part of Scholastic's mission and daily work. Turning to our recently completed third quarter, despite the $96 million or 26% decline in revenue, mainly in book fairs, we were able to improve operating loss year over year because of the significant cost reductions we've made throughout the business. For the nine months year to date, revenue declined by $304 million to approximately $900 million, this year compared to our pre-COVID results last year, but our operating income only decreased by $9.7 million, excluding one-time items. Our actions to change our operating model and reduce our cost base have largely offset the bottom line impact of the pandemic-related disruptions and should provide operating leverage going forward as we rebuild our revenues, which is an in-progress goal. As we begin the fourth quarter, most schools across the United States are returning to in-classroom instruction and the climate for book fairs is improving. Book fairs have always been a key part of school leaders' calendars and we are continuing to tailor fair formats to enable safe and flexible experiences. While schools are still unsettled and back-to-school patterns vary throughout the U.S., there has been an uptick in Q4 fair bookings. helped by our intensified marketing programs. While the number of book fairs we will conduct in fiscal 2021 will be significantly lower than our historic norms, we are seeing a marked improvement in our in-person fair counts for the fourth quarter from the low levels of the previous four quarters, giving us reason to be optimistic for our book fair business in fiscal 22. In clubs, we have sharply improved the bottom line as we re-engineer the business to drive profitability on reduced revenues. We've improved distribution efficiency, reduced marketing spend, and increased revenue per item sold. Our pivot to at-home delivery led to higher revenue per transaction from parents, helping profitability. Our warehouse teams function well throughout the year despite difficult supply chain issues and change processes within our distribution center to reflect safety measures for the staff. These planned changes in the club business led to substantial improvements in operating income. Meanwhile, our trade education and international businesses continue strong in both revenues and profitability for the quarter and the nine months here to date. In trade, we are showing continued strength in our ability to publish highly sought-after titles, both in the U.S. and internationally. As a result, from fiscal 2018 through our current quarter, trade revenues have grown by approximately 50% domestically and 30% internationally. Our expertise in curating a strong, diverse lineup of titles that parents want to buy and kids want to read continues with our recent bestsellers such as the new Wings of Fire novel and Cat Kid Comic Club from Dave Pilkey. In fact, Publishers Weekly recently noted with this headline, Unstoppable. our unstoppable performance in children's fiction, with our titles taking a 44% of the 2020 bestseller chart in Publishers Weekly, up from 28.8% last year, no small feat. We are also building the audience for our iconic characters and series through an increasing pipeline of streaming, television, and feature film development, and have seen a wonderful response to recent properties, As just one example, Stillwater, our Apple TV animated program based on Zen Shorts by John J. Muth, has been launched in 107 countries and was just nominated for an Annie Award. We also had our second ratings hit on the Hallmark Channel with a movie, Plain Cupid, based on the book by Jenny Meyerhoff. In our international segment, we have had significant growth in profits throughout the year, thanks in part to our successful revenue increases in trade. Similar to the US, fair counts in Canada and the UK declined, but we implemented cost reductions and set the stage for resumption of fairs growth next year. In Australia, where there was a lesser impact on schools from the pandemic, fairs have continued to be strong. In Asia, we are investing in new English language learning products for schools and homes and continue to expand our franchise schools and direct sales to parents via Internet marketers in China. We are also working with a local partner to develop digital content designed for English education and teaching solutions in Korea. While our improved profitability in our international business was also helped by government subsidies for labor in the UK, Canada, and Australia, we will manage our costs down as these subsidies drop off. Responding to increased opportunities for our education business, we are forming a new education solutions group. that combines our Classroom Books and Curriculum Division with the Classroom Magazine's Digital Subscriptions and Teaching Resource Group, beginning June 1st, our new fiscal year. Rose Els Mitchell returned to the company this year to lead this group. bringing her deep understanding of the education market and proven skills in digital product development. Our new structure, which brings the editorial strength of our classroom magazine group together with our digital product team and research-based instructional solutions, all supported by marketing and field selling teams, will put us in an excellent position to capture growth opportunities focused on literacy improvement. The company believes it can benefit by expanding our resources and education to meet the unprecedented amount of federal stimulus funds dedicated to supporting K-12 education over the next two to three years. This federal investment of $180 billion, which is three times the normal investment in one year of federal money going to schools, will be a game changer for educators and districts, providing them desperately providing resources to invest in the teaching and learning solutions that they desperately need to prevent a prolonged learning equity and development crisis for our young generation brought on by the challenges of the pandemic. The child care tax credit investments in family health and support for K-12 schools should all work together to improve the lives of children supported by schools and education. As districts reopen schools now in early 2021, they're focused on flexibility, connectivity, and increased use of technology, building on lessons learned during the pandemic. Many districts are also discussing home learning as an ongoing initiative and are increasing outreach to build family engagement, especially for young learners. These are areas of scholastic strength. And we're putting our resources behind these areas that address both the urgent and longer term needs of educators. You can see this through our new learning resources, such as Pre K on my way, a curriculum program for early childhood, which is launching the spring for purchase in Q1 of fiscal year 2022 and beyond and our redesigned summer reading offerings. Summer reading has always been an important business to Scholastic, particularly in our education group, and we have a history of supporting summer learning success with book packs and critical programs like Lit Camp. We are the ideal partner in this crucial moment because of our deep knowledge of how to engage kids in reading and accelerate their learning. While our free summer reading program continues to serve as an entry point for many, this year we are creating new offers which build on what we know works well. Clubs and fairs will also be more active in our summer efforts and in this all-hands-on-deck moment for our nation's students to gain reading skills during the summer. With our reduced cost base from our $100 million cost-saving program, Targeted investments focused on our expanding growth opportunities and new federal funding provided much needed resources for our customers. We believe we are in an excellent position to further solidify our market leadership in literacy and learning. Our major opportunities and priorities over the next years lie in the following areas. First, rebuilding our fair revenue. Second, expanding the reach of our intellectual property through our trade and international book publishing businesses and developing more streaming, television, and feature film properties. Third, increasing investment in and expanding the reach of our education content, especially digital. Fourth, enabling more parents to acquire children's books directly via home shipment. Fifth, growing our international English language learning business in Asia. And then supporting these, six, continuing to make it easier for our customers to acquire product and information through our digital platforms. And seven, finally, continuing to simplify our internal processes while lowering costs. With these key priorities, we expect to increase revenue and profitability in the next years based on our ability to learn the lessons from the pandemic and and continue to adapt to the rapidly changing worlds of technology and access to information as well as improved methods of distribution. As we realize how much we have done to change our business in this pandemic year, It is clear that the Scholastic employees did an extraordinary job of adapting our services to maintain and expand the substantial value we bring to our customers. Together, we completely reimagined the way that we get books into the hands of kids. This is a significant achievement given the drastically changed conditions and on-the-fly adjustments that were necessary during the heart of the pandemic, when many supply chains and delivery processes were severely disrupted. We've repurposed our assets, improved capacity and delivered product in school and at home in both more efficient and customized ways. And our progress should continue to provide leverage as we ramp up next year. Many employees work remotely from home for the full year. Others came to work in our warehouses, adjusting to new ways of working brought on by the pandemic. as well as making new delivery methods work, enabling the growth of ship-to-home or providing for the sale and packaging of individualized book bags sent directly to the homes of millions of children. Our success this year stems from our employees' ability to serve the customer in new and innovative ways. We thank them sincerely and deeply for defining the strengths of Scholastic in providing reading and learning to young people. We continue to be cautiously optimistic about the fourth quarter, and we are confident that our school-based distribution channels will have a strong longer-term recovery. We remain focused on capturing the significant opportunities ahead while building momentum in the areas that succeeded during the pandemic. We're building also in areas that were most deeply affected and gaining leverage from our cost reduction programs. In our challenging 100th year, Scholastic once again proved its ability to move decisively in new ways to make reading and learning available to children, parents, teachers, and schools, whatever the circumstances required, thus continuing to define Scholastic's support for schools and families in helping children learn and grow. With that, I will pass the call to Ken Cleary.