Scholastic Corporation

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Good day and thank you for standing by and welcome to Scholastic Reports Q2 fiscal year 2023 results conference call. At this time all participants are on a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeffrey Matthews. Please go ahead.

Welcome everyone to Scholastic's fiscal 2023 second quarter earnings call. Today on the call, I'm joined by Peter Warrick, our President and Chief Executive Officer, and Ken Cleary, our Chief Financial Officer. As usual, we posted the company investor presentation on our IR website at investor.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, and actual results may differ materially from those currently anticipated. In addition, we'll be discussing some non-GAAP financial measures defined in Regulation G. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the company's earnings release and in company's financial tables filed this afternoon on the form 8K. This earnings release has also been posted to our investor relations website. We encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. If you have any questions after today's call, please send them directly to our IR email address, investor underscore relations at scholastic.com. And now I'd like to turn the call over to Peter Wark to begin this afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone, and thanks for joining us. Scholastic delivered strong revenue growth and higher earnings in our second quarter of fiscal 2023. As we successfully navigated continued market and cost headwinds, during the important back to school season. The company's sustained momentum reflected three things. First, the strength of Scholastic's brand, unique channels, children's content and educational products. Second, the improved operating efficiencies we've achieved over the past three years. And third, our continued investments in long-term growth opportunities. Last quarter, we continued taking steps to deploy capital for long-term growth and shareholder value. We completed our acquisition of Learning Ovations and made progress integrating its product, technology, and team. We also accelerated capital returns to shareholders, executing a modified Dutch auction tender offer and expanding our open market share repurchase authorization as announced this afternoon. We expect this momentum to continue in the second half of fiscal 2023, especially in our seasonally important fourth quarter, and have affirmed our guidance for the year, as I'll discuss further in a moment. These are very encouraging results, but I'm especially proud of Scholastic's nearly 7,000 employees who continue to perform at such a high level without losing focus on Scholastic's important mission and enormous long-term opportunity supporting the growth of children through literacy and the power of stories. This afternoon, I'd like to review our momentum and outlook across our business. Ken will then walk through our financial results and expectations for fiscal 2023. But first, a few words on the current business environment. As has been widely reported, consumer confidence in the US has continued to decline this fall, even more so in the UK and Canada. two of our largest international markets. This has impacted the retail book selling environment, which has been softer this calendar year compared to a strong year in 2021. In US schools and school districts, federal and state funding remains at historically high levels. But as we discussed last quarter, Short staffing and the need to digest last year's product purchases have lengthened selling cycles across the industry and shifted some expected sales into our fiscal fourth quarter. On the cost side, paper, manufacturing and shipping costs remain at high levels. In this light, I believe Scholastic's quarter two gains are even more impressive, indicative of our company's strengths and competitive advantages. And I'm also optimistic about the near and long-term market outlook. In the short term, there are encouraging signs of a rebound in consumer confidence as, for example, gas prices have fallen. Also, the impact of higher input costs is now fully reflected in cost of product on our P&L. After first flowing through inventories, reducing that year-over-year headwind. There are signs of cost improving in some areas, including reduced leak times for inventory purchases, and lower transportation costs. In the long term, we see families and kids need and demand for literacy and stories to promote happiness, knowledge, and confidence only growing in the future as the world becomes even more complex and competitive. There's also strong consensus that pandemic-related declines in students' reading skills, which are already distressingly low in the US, demand sustained long-term investments in new outcomes-based approaches to teaching literacy, especially in the earlier grades. And this is exactly where Scholastic's brand, experience, teacher relationships, and sales channels are strongest, and where we're targeting investments to scale our education solutions business. So turning to our quarter two results, last quarter's gains were led by strong results in the children's book segments. Revenues rose 19%, reflecting robust sales in Scholastic's unique school-based book fairs and book club channels, and the benefit of our best-selling children's publishing. Operating income increased 33%, driven by higher sales, strong operating leverage, and improved efficiencies. The Scholastic book fairs team achieved a record fall, with revenues up 37%. Fair counts rose to 85% of pre-pandemic levels as we'd planned, compared to 70% a year ago, and we experienced even stronger revenue per fair than last year. In book fairs, operating leverage on higher sales, as well as investments over the past three years to optimize warehouse branches, enhance processes, and improve overall marketing and sales efforts, all these contributed to higher segment profitability. In our trade channel, revenues held near last year's high levels. Best-selling publishing and multiple new releases mostly overcame the impact of a softer retail market. They also benefited sales in our other channels and in our international and export businesses. Scholastic's graphics imprint continues to dominate the young adult graphics novel segment which it effectively created. In November, Scholastic Titles held 18 of the top 20 bestsellers on NPD Bookscan's Young Adult Graphic Novel list. Dave Pilkey's newly released Cat Kick Comic Club No. 4 held a No. 1 position, and in fact was the best-selling title, children's and adult categories, in its first week of release, also performing well in school channels. Scholastic also continues to benefit from a tremendously strong backlist of children's and young adult books and series, including recent classics like Harry Potter, of course. Last quarter, orders for the new illustrated edition of Harry Potter and the Order of the Phoenix were strong and were excited for the upcoming 25th anniversary of the series next September. J.K. Rowling's Christmas Pig also sold very strongly in its second season, on its way to becoming an evergreen holiday classic. We continue to successfully develop our IP for the screen, too. Stillwater, the animated series on Apple TV+, which celebrates mindfulness and is based on John Mooth's titles, just this past weekend received its second Emmy Award. We're eager to see the positive response to Eva the Owlet in quarter three and the live action Goosebumps series later on. Book clubs revenues rose 11% last quarter relative to the prior year quarter when the business experienced significant labor and systems issues that delayed revenues into the third quarter of fiscal 2022. Book clubs have experienced higher revenue per event but lower than forecast teacher participation so far this school year. in part reflecting the enormous and increasing demands on teachers' time. We're focused on the activation and reactivation of teacher sponsors and increased student and family participation. At the same time, book clubs continue to provide a critical connection between Scholastic and teachers, families and kids, which benefits the entire company. Book club flyers and the club's online presence are key channels that build awareness of new book titles, reinvigorate the backlist, feed potential purchases to our website, and reinforce the Scholastic brand. Now, moving to education solutions. Quarter two sales to schools, districts, and states held steady at last year's record levels as we continue investing in the division's long-term growth opportunity. As mentioned earlier, longer selling cycles for educational products are having an impact on timing. This dynamic means that some of the sales that in prior years we might have expected in the first and second quarters, we now expect to come through in the second half and in the fourth quarter in particular. As planned, continued strategic investments in long-term go-to-market capabilities for this segment impacted operating income. We're progressing well with the integration of the recently acquired A2I literacy assessment and instruction system, and LearningOvation's development, professional learning and research teams are now integral parts of the education solutions division. Increased employee-related costs will assist in the continued development of the company's comprehensive digital literacy platform. Next, looking at our international segment, in local currency, revenues increased 8%, but declined overall due to the strengthening of the U.S. dollar. Higher local revenues were primarily driven by continued recovery of book fairs and the success of the company's best-selling series titles in trade. However, revenues were also impacted by more challenging market conditions in Canada and the U.K. than in the U.S. Segment operating income decreased 2 million, reflecting higher inflationary costs related to freight, paper, fuel and labour in major markets and economic conditions in Canada and the UK. This was partially offset by improved margins in Asia and export following the company's exit from the low-margin direct consumer business in Asia, which generated losses in the prior period. As I previously discussed, we're confident in our ability to continue navigating the current business environment and are affirming our fiscal 2023 guidance for adjusted EBITDA of 195 to 205 million based on our momentum in the first half of the year and expectations for a strong fourth quarter following a seasonally smaller third quarter. When looking ahead at the second half of fiscal 2023 and our plan to achieve this goal, It's important to consider Scholastic's business seasonality, which now more closely resembles what we routinely experienced before the pandemic. Traditionally, the second and fourth fiscal quarters have been our largest, most profitable periods, with losses recorded in the smaller first and third quarters when schools are on summer or winter holidays. I'd also point out that earnings and adjusted EBITDA have typically been highest in the second half of the year. We're seeing a return to this seasonality in fiscal 2023, and we expect the final quarter of the year, that's to say March, April, and May, to be driven by the strength in our book fairs and strong sales in education solutions. Finally, I'd like to address Scholastic's continued progress towards its capital allocation strategy and priorities. As I've said, Scholastic's significant margin improvements over the past three years and our strong free cash flow outlook create new opportunities to deploy capital to strategic growth. At the same time, they enable us to maintain a strong balance sheet and return excess capital to shareholders. Last quarter, the company returned over $32.9 million to shareholders through an increased dividend open market repurchases and the modified Dutch auction tender offer. Today, we also announced that our board has significantly expanded the company's open market repurchase program with an increased authorization of $48.8 million to make $75 million currently available for this purpose. In order to deploy this authorization, we'll take maximum advantage of opportunities under our open market repurchase program. As we look ahead, we'll continue to pursue opportunities to deploy capital in three key areas consistent with our allocation priorities. First, we'll continue to invest in building or acquiring strategic products and capabilities that leverage our current brand channels and capabilities. For example, investments to build capacity and efficiencies in our book fairs and Jefferson City distribution networks. We'll also continue to explore larger, more transformative investments to build or acquire new platforms as we're doing with our literacy platform. We'll continue to leverage the strength of our balance sheet to manage risk and support our operations as we've done by funding early inventory purchases or payment discounts to offset supply chain difficulties and higher costs. We'll also continue to review opportunities to optimize our capital structure while protecting our balance sheet strength. And third, we're committed to continuing to return excess capital to shareholders In addition to our dividend, which we raised this summer, and expanded open market repurchases, we'll continue to explore additional return mechanisms as we undertake to build market liquidity in our stock to facilitate future repurchases. And now I'll ask Ken to provide greater detail on the quarter's results.