Scholastic Corporation

Thank you for standing by and welcome to Scholastic's third quarter fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode. I would now like to hand the call over to Jeffrey Matthews, EVP, Corporate Development and Investor Relations. Please go ahead.

Hello, and welcome everyone to Scholastic's Fiscal 2023 Third Quarter Earnings Call. Today on the call, I am joined by Peter Warrick, our President and Chief Executive Officer, and Ken Cleary, our Chief Financial Officer. As usual, we posted the 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 will be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliation of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and the company's financial tables filed this afternoon on a Form 8-K. 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. Should you have any questions after today's calls, 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 the afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone. Thanks for joining us. In the fiscal 2023 third quarter, Scholastic recorded modest sales declines and higher losses as we continue to navigate short-term market headwinds, whilst also increasing investment for the long term in blended learning programs and digital tools in our education solutions business. As a reminder, Scholastic's third quarter is seasonally smaller and typically loss-making. We have modestly lowered our financial guidance for FY23 as a result of the ongoing softness we're seeing in the retail book-selling market and purchasing delays for educational materials on the part of schools and school districts, something that has impacted our Q3 results and we now expect to continue into Q4. Our team has taken decisive steps to align short-term spending across the company with our new top-line outlook. They've dedicated themselves to initiatives to improve margins. The team is also being mindful to protect strategic growth initiatives that are essential to our near and long-term opportunities. We remain confident in the performance and long-term outlook for our business, in our market-leading children's book publishing, in providing high-quality blended learning solutions for schools, and in our international business. Reflecting that optimism, in the third quarter, we returned over $50 million to shareholders, in addition to investing in key growth opportunities. We're more committed than ever to deploying our capital to drive long-term growth and sustained value for our shareholders and all stakeholders. This afternoon, I'd like to review our results and outlook in more detail. Ken will then walk through our financial results and revised expectations for fiscal 2023. I'd like to begin with an update on the current business environment, where the headwinds we described on last quarter's call continue to affect our industry and our business. First, the near-term retail book selling environment, especially for children's books, continues to be challenging compared to a year ago. Consumer demand and confidence has fallen in the face of ongoing inflation and economic uncertainty. We're seeing this in the U.S. as well as in Canada, the U.K. and Australia and New Zealand, Scholastic's major international markets, which are also being impacted by the strong U.S. dollar. While children's retail book sales have historically been less cyclical than other areas of discretionary consumer spending, some of the year-over-year decline in the third quarter may reflect a one-time return to pre-pandemic purchasing patterns by our retail partners and end customers. After stocking up due to supply chain uncertainty and challenges during the pandemic, retailers and wholesalers are resuming more normal inventory management policies. Similarly, retail book sales benefited over the past couple of years as families bought more children's books during the lockdown, which we are now lapping. Second, as we discussed during our last two calls, school and district administrators still face a pressing need to manage staffing challenges, which has lengthened selling cycles for instructional materials across the industry. This is delaying sales, even as federal and state funding for U.S. schools remains at historically high levels. Third, as seen throughout the economy, costs remain high for paper, manufacturing and freight and shipping in particular. These costs are now fully reflected in the inventory we're currently selling, impacting margins across our business. We are, however, beginning to see improvements in these areas, especially in freight and shipping costs. which should create tailwinds in coming quarters as they flow through into our margins, in addition to the benefit of price increases that are reflected in inventory that's currently being sold. Importantly, I'd like to emphasize that we believe all of these trends are short-term and not the new normal. Let me now walk through our quarter three results in light of these factors. In the children's book segment, revenues rose 1.5%, outperforming declines in the overall children's book market. Book fairs revenues grew an impressive 36% in the quarter, benefiting from increased fair count, which we expect to reach approximately 85% of pre-pandemic levels. Robust increases in revenue per fair also contributed to higher sales, further underlying the differentiated value proposition of scholastic school book channels compared to retail channels. Today, the unique book fair's experience is as exciting and fun as ever for schools, parents, families, and most importantly, kids, as we've innovated, modernized, and increased kid appeal. This is borne out by the higher fair participation we're seeing compared to pre-pandemic levels. Growing revenue per fares has also been favorably influenced by successful kid-centric product selection and merchandising innovations like eWallet and the expansion of our friends and family functionality, which allows family members and friends to fund the kids' fare purchases. We're excited about opportunities to continue investing in the fair experience, to make it easier and more fun for kids and families to participate, buy books and support their schools, while also making fairs available to more kids, families and communities through our comprehensive equity initiatives. As expected, book clubs declined compared to the prior year period, when sales benefited from a significant one-time backlog in shipments. book clubs continued to experience higher revenue per event but lower than forecasted participation by hard-pressed teachers. As we focus on activating and reactivating teacher sponsors and increasing student and family participation across all school channels, We're also exploring ways to leverage Book Club's strategic strengths across the company, especially building awareness of new titles, driving online traffic, and reinforcing the Scholastic brand. Looking across our school channel, sales were up double digits last quarter, even in a difficult overall market. These results demonstrate the power of Scholastic's publishing and our trusted position in schools to engage and excite kids about reading and books. We're excited about the innovations and improved efficiencies we've achieved since the pandemic, and even more excited for innovations that will come from greater collaboration across our business. Turning to our sales in the trade channel, sales declined in line with overall softness in the retail market. This dynamic primarily impacted backlist titles and was partially offset by best-selling new titles, especially from our graphic novel imprint, Graphics. These include new graphic novel titles in major series like Heartstoppers, Cat Kick Comic Club, Wings of Fire, and The Babysitter's Club. Anticipation and early orders are also very encouraging for number 11 in Dave Pilkey's best-selling series Dogman, 20,000 Fleas Under the Sea, which goes on sale on March 28th and should benefit our quarter four results. Speaking of our major franchises, Scholastic Entertainment is a key component of our strategy to build must-read series and franchises. At the end of last quarter, we had nearly 40 projects in development and three in production. We're very excited that Eve of the Owl launches on Apple TV Plus next week. It's produced by Scholastic Entertainment and based on our New York Times best-selling book series, Owl Diaries. Supported by an extensive joint marketing effort with Apple, we're promoting Eva across our channels and publishing Eva even held center stage in the Scholastic-sponsored World Read Aloud Day last month. Now moving to education solutions. In quarter three, sales were down or were delayed into quarter four or in some cases into fiscal 2024. partly as a result of ongoing selling challenges into schools and district administrators, as described a moment ago. In response to this uncertain environment, we've taken actions to manage sales opportunities and partner with administrators to best support their key decision-making and operational needs. Sales of supplemental print programs and collections were impacted most in Quarter 3, In contrast, revenues from our state-sponsored programs, including in Florida, remained solid against a big prior year comparison. We were pleased to be chosen by the state of Louisiana as their partner for READ, a new state-funded book and literacy program designed to help support pre-K-4 through 5th grade students in the state who are not yet reading on grade level. Scholastic will provide eligible students with home delivery of free, age-appropriate, high-quality and engaging literacy resources beginning shortly. Last quarter, we also increased our investments in go-to-market capabilities and in our literacy platform strategy, led by our new Senior Vice President, Andreas Voigt. We announced the launch of Ready for Reading, a new simple-to-implement print and digital K-3 phonics program aligned with the science of reading. It's also our first speech-enabled literacy product, powered by a new partnership with Soapbox technology. Soapbox's award-winning artificial intelligence-based speech engine has been built to accurately recognize children's voices and diagnose reading fluency issues, regardless of background, age, or ethnicity. This technology benefits both teaching and learning. Young students use their voices to independently practice reading aloud while building confidence as they learn. Educators gain actionable, real-time feedback to personalize and target instructional time. We're very excited about Ready for Reading, which will be in the market this summer. Evidence and science-based approaches have become key considerations for district administrators and educators purchasing new literacy programs and supplemental materials. We believe this is a positive trend for kids and for Scholastic long-term. Our editorial team and authors are deeply committed to outcomes-based approaches to literacy, as seen most recently in our acquisition of A2i and announcement of Ready for Reading. Independent reading is also a key component of any science-based approaches to literacy. Scholastic is uniquely positioned to provide kids relevant and diverse books that engage and excite them, and we're taking steps to update our paperback collections to take advantage of this trend. Next, looking at our international segment, in local currency, revenues decreased 18%, partly driven by the exit of the unprofitable direct consumer business in Asia in quarter one. In addition, international results were impacted by lower trade sales in Canada, the UK and Australia, partly offset by strong performance in book fairs. While conditions in our major international markets are currently challenging, we remain optimistic about Scholastic's long-term prospects outside the US, especially as we further expand our global publishing, product development and cross-company collaboration. Next, I'd like to address Scholastic's continued progress towards its capital allocation strategy and priorities. Following October's tender offer and the expanded $75 million authorization we announced with our Quarter 2 results, we substantially accelerated open market share purchases in Quarter 3, in addition to our regular dividend. In total, we returned over $53 million in the quarter, bringing our total year-to-date amount up to nearly $100 million. In support of this progress, our Board of Directors has authorized an additional $50 million for repurchases. As we look ahead, we'll continue to pursue opportunities to leverage our balance sheet and deploy capital by first investing in growth opportunities, Second, maintaining a strong and efficient balance sheet. And third, returning excess cash to shareholders to enhance their returns. As Ken will discuss in more detail shortly, we revised our FY23 guidance based on results in quarter three and an updated outlook for our seasonally important quarter four, both of which have been impacted by short-term headwinds in the retail book selling and the U.S. educational materials markets. Regardless of the ongoing short-term volatility being experienced across our industry and economy, we're confident that in the near and long term, the critical need for children's books and for solutions to help kids learn to read will remain paramount. And we're bullish about Scholastic's unique ability to address these important needs and to grow. And now I'll ask Ken to provide greater detail on the quarter's results.