Scholastic Corporation

Q3 2023 Earnings Conference Call


spk_0: thank you for standing by and welcome to study scholastic third quarter fiscal year twenty twenty three earnings call at this time all participants on a list and only mode are now like the hand the call over to jeffery matthews even if he corporate development and investor relations please go ahead
spk_1: hello and welcome everyone is classics fiscal twenty twenty three third quarter earnings call diana call i'm joined by peter work or president and chief executive officer and can cleary or chief financial officer as usual we posted a better presentation on her i our website and investors that scholastic that come with 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 the edition we'll be discussing some non gap financial measures and defined in regulation g the reconciliation as measures to the most directly comparable gap measures have you found in the company's earnings release and a financial tables file this afternoon on a form a k this earnings release has also been posted are investor relations website we encourage you to review the disclaimers in the release an investor presentation interviewed a risk factors disclose the company's annual and quarterly reports father the as his he she's giving questions after today's cause please him them directly to our i are email address investor underscore relations as classic that come and now had i turn to call of the pier work to be in the afternoons presentation
spk_2: thank gas and good afternoon everyone thanks for joining us in the fiscal twenty twenty three third quarter scholastic recorded not a sales decline as and higher losses as we continue to navigate short term lockheed headwinds whilst also increasing investments in a long term in blended learning programs and digital to bills in our education solutions business as a reminder scholastic third quarter is seasonally smaller and typically loss making we have modestly lowered our financial guidance for f y twenty three as a result of the ongoing softness we're seeing in the retail bookselling market and purchasing delays for educational materials on the part of schools and school districts something that has impacted our quarter three results and we now expect continue into quarter for our team has taken decisive steps to align short ten spending across the company with i knew topline outlook dave dedicated themselves to initiatives to improve margins the team is also being mindful to protect strategic growth initiatives that are essential to i near a long time 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 to schools and in our international business reflecting that optimism in the third quarter we returned ever fifty million dollars to shareholders in addition to investing in key growth opportunities we more committed than ever to deploying our capital to drive long term growth will sustain value for our shareholders and all stakeholders this afternoon i'd like to review our results now looking more detail can will then walk through our financial results and revised expectations successful twenty twenty three i'd like to begin with an update on the current business environment where the headwinds we described or last quarter's call continue to affect our industry and our business first the near term retail bookselling environment especially for children's books continue to be challenging compared to a year ago consumer demand and confidence of fallen in the face of ongoing inflation and economic uncertainty the thing this in the us as well as in canada the uk and australia and new zealand scholastic major international markets which are also being impacted by the strong us dollar while children's retail book sales have historically been less cyclical and other areas of discretionary consumer spending some of the year over year decline in the third quarter may reflect a one time returned to pre pandemic purchasing patterns by our retail partners and then customers after stocking up to to supply chain uncertainty and challenge is during the pandemic retailers and wholesalers a resuming more normal inventory management policies similarly retail book sales benefited over the past couple of years as families bought more children's books showing the lockdown which we are now lapping
spk_3: he
spk_2: second as we discussed during our last two calls school and district administrators still face a pressing need to manage stuff in challenges which is lengthened selling cycles for instructional materials across the industry this is delaying fails even as federal and state funding for us schools remains that historically high levels third have seen throughout the economy costs remain high for paper manufacturing and friends 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 and shipping costs which should create wins in coming quarters of they flow through into our margins in addition to the benefit it a price increases the to reflected in inventory is currently being sold importantly i'd like to emphasize that we believe all of these trends and short term and not the new normal let me know want to our quarter three results in light of these factors in the children's books segment revenues rose one point five percent outperforming declines in the overall children's book marcus book fairs revenues grew an impressive thirty six percent in the quarter benefiting from increased fact sounds which we expect to reach approximately eighty five percent of pre pandemic levels robust increases in revenue per se also contributed to highest sales further underlying the differentiated value proposition of scholastic schoolbook channels compared to retail channels today the unique book says experience is is exciting and fun as emphasis schools parents families and unless importantly kids as we've innovated modernized new increased kid appeal this is borne out by the highest their participation way seeing compared to pre pandemic levels trying revenue process has also been favorably influenced by successful kid centric products election and merchandising innovations like a wallet and the expansion of our friends and family functionality which allows family members and friends the some the kids fair purchases we're excited about opportunities to continue investing in the era experience to make it easier and more fun for kids and families to participate by books and support their schools while also making fares available to more kids families and communities to our comprehensive equity initiatives as expected book club decline compared to the prior year period when fails benefited from a significant one time backlog in shipments book clubs continue tight sparing higher revenue per event at lower than forecasted participation by heart press teachers as we focus on activating and reactivating teacher sponsors and increasing students and family participation across all school channels are also exploring ways to leverage book club strategic strengths across the company especially building awareness of new titles driving online traffic and reinforcing the school plastic 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 publishing and i trusted position in schools to engage next fight kids about reading books when excited about innovation innovations an improved efficiency as we've achieved since the pandemic and more excited for innovations that will come from great a 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 backless titles and was partially offset by best selling new titles especially from my graphic novel in print graphics these include new graphic novels titles in maine you here is like hard stoppers cat kid comic club wings a fire and the baby sitters club anticipation in l a orders are also very encouraging the number eleven and a pick his bestselling series dog man twenty thousand fleas of under the sea which goes on sale on march twenty eight and should benefit our quota for results speaking of our major franchises scholastic entertainment is a key compare into our strategy to build must read series isn't franchises at the end of last quarter we had nearly forty projects and development and three and production we very excited that even the outlet launches an apple tv plus next week it's produced by scholastic entertainment's and based on our new york times bestselling book series out is supported by an extensive joint marketing effort with apple were promoting eva across our channels and publishing either even held center stage in the scholastic sponsored world read aloud de la now moving to education solutions and quarter three sales were down there were delayed into quarter for are in some cases into fiscal twenty twenty four partly the result of ongoing selling challenges into schools and district administrators as described a moment ago in response to the some fat in an environment we taken actions to manage sales opportunities and partner with administrators to best support their key decision making and operational names sales of supplemental print programs and collections were impacted most in court a three in contrast revenues from a state sponsored programs including in florida remains solid against the big price comparison we were pleased to be chosen by the state of louisiana as their partner so read a new state funded book and literacy program designed to help support pre k for true fifth grade students in the states were not yet reading on grade level scholastic will provide eligible students with home delivery of free agent prep he had high quality and engaging literacy resources beginning shortly last quarter we also increased our investments and go to market capabilities and in our literacy platform strategy led by a new senior vice president andrea's fault we announced the launch of ready for reading a new simple to implement print and digital k through three phonics program aligned with the signs of reading it's also our first speech enables literacy product powered by a new partnership with soapbox technology soapboxes award winning archivists shall 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 very excited about ready for reading which will be in the market this summer evidence from the 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 scholastic long term our editorial team and off as a deeply committed to outcomes based approaches to literacy a seamless recently in our acquisition of a to i and announcement and ready for reading independent reading is also a key component of any signs based approaches to literacy scholastic is uniquely positioned to provide kids relevant and diverse books that engage in a fight them and we're taking steps to update our paperback collections to take advantage of this trend next looking at our international segments in local currency revenues decreased eighteen percent partly driven by the exit of the unprofitable direct cause theme of business in asia and course of one in addition international results were impacted by low a 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 long term prospects outside the u s especially as we further expand our global publishing product development and cross company collaboration next i'd like to address scholastic continued progress towards his capital allocation strategy and priorities following oct tender offer and expanded seventy five million dollar authorization we announced without quarter to results we substantially accelerated open market share purchases in court at three in addition to our regular dividend in total were returned ever fifty three million dollars in the quarter bringing total year to date and mounds up to nearly a hundred million in support of this progress or board of directors has authorized an additional fifty million for repurchases as we look ahead will 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 of can will discuss in more detail shortly we revised r f y twenty three guidance based on results in court a three and an updated outlook for our season important quarter for both of which have been impacted by shorts and headwinds in the retail bookselling and the us educational materials markets regardless of the ongoing short term bala killer to being experienced across our industry and economy
spk_4: 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 were bullish about scholastic unique ability to address these important needs to grow and now i'll ask can to provide greater detail on the coup
spk_1: porter's results thank you peter good afternoon today i will refer to are just results for the third quarter excluding one time items in the prior year period unless otherwise indicated no record no one time items in this third quarter please refer to a press release table and as you see filings for complete discussion one time items as peter discuss capri performance was lower than expected partly due the near term sovereign new retail children's book market not going proceed delays by schools and district or ministers in children's books or book fair it's channel outperform the prayer achieving higher fair account and revenue per fare partially are spain the selling challenges in the trade market and continuing trend in booklets operations we can to experience higher cost of inflationary and supply chain pressures we're starting to see these higher costs slow in education solutions we took steps to that to more challenging market environment we also invest no long term
spk_0: literacy platform including the upcoming launch and a new k three phonics system ready for reading the integration of eight you i and the build out of staff and capabilities to compete in his education solutions market likewise we're investing and modernized distribution as as an automation to reduce cost and him
spk_1: through customer service we can to the opportunities to optimize certain amounts of our business was see substantial growth opportunities in the education solution space in a book fairs operations as such we remain bullish on a long term outlook for the future but we acknowledge some short term headwinds to our operations
spk_0: as a result of the softness in the retail book market and the uncertainty of queue for education solution sales were up there are guys we now expect adjusted ebitda of one hundred and seventy five million to one hundred and eighty five million in revenue growth of approximately four percent turned to arkansas a financial results
spk_5: revenues decrease six percent to three hundred twenty four point nine million dollars offering loss in the quarter was point seven point seven million dollars versus sixteen point seven million dollars last year
spk_1: net loss was nineteen point two million dollars compared to thirteen point two million dollars last year and just it either dog was a loss of five point four million dollars compared to again of five point nine million dollars in the third quarter of last year
spk_5: last pretty share was fifty seven cents compared to a lot of thirty eight since last year for the nine month period revenue was one billion one hundred and seventy six million dollars compared to one billion one hundred and twenty nine million dollars last year and operating income was fourteen point three million dollars compared to thirty one point four millie
spk_1: dawn's last year nine month adjust the the guy was the one point three million dollars compared to one hundred point four million dollars last year net cash provide by offering activities for nine month period was twenty eight point nine million dollars compared to one hundred seventy point five million dollars last year free cash use for the nine month period was twenty five point seven million dollars compared to free cash flow one hundred forty seven point nine million dollars last year
spk_0: who successfully acquired inventory during the first half of this year in anticipation of increase sales and longer lead times which has enabled the growth we seen in children's books everyday purchases year date have increased approximately one hundred and forty million dollars over last year while inventory prices in the third quarter decrease by approximately twenty
spk_1: by million dollars respect the foliage have positive free casual between twenty five million and thirty by million dollars respect future years to return to a more normal free casual parent we experienced this year you are need to build back inventory levels as mention inflationary supply chain pressures that have caused the current fiscal years
spk_0: increase in paper printing wage and transportation costs are beginning to abate last year into early this year we spears higher product costs of approximately fifteen percent compared to late and calendar year twenty twenty one and higher wage costs of as much as twenty percent for driver and distribution lamer the rate of ink
spk_5: greece has slowed dramatically and in the case of overseas transportation cause has declined from peak levels a top priority was to ensure we could meet the man and get there are strong recovery from the pandemic notably in our book fairs and education solutions operations to do this we procured substantial quantities of them and toy when lead for purchases were longer and costs were higher accordingly the image or we are currently selling and will contain itself or critical for quarter was procured at relatively high prices which will be reflected nor margins with this context of hire him and sorry pass and purchasing this year i like to dedicate a few minutes to discussing some of the ways are greatly improved our procurement newman tory management as well as relayed distribution activities for long term i'll supply chain is more resilient we have broadened are vendor based include vendors from around the world including europe he america's in asia
spk_1: this broader array of vendors allows us substantial leverage in sourcing product we've also striking relationships with key us vendors who do to close proximity with our warehouse facilities and added capacity can reduce lead times for orders dramatically
spk_0: scholastic supply chain inventory management is also more agile we have an able to use a digital printers who can provide small print runs to reduce waste and quickly meet near term customer demand were developed products specification standards that allows to simplify the manufacturing process on showing the highest quality product for a customer this we have a great tools and resources the better match the timing and quantities as supply to customer demand last are planning process he's are more strategic we have an analytics and tools to optimize our qureshi an offering and better coordinate these efforts with are marking programs allowing us to
spk_1: better understand our customer base and provide the appropriate prior to targeted market segment
spk_0: all these improve capabilities developed since the beginning of a pandemic and supply chain crisis will enable us to reduce him and tory cause reduce waste and margins and most importantly sure we have the best product to meet our customers the man
spk_1: now back to our financial review at the end of the quarter cash and cash equivalents exceeded total debt by one hundred ninety three point six million dollars compared to two hundred and ninety five point two million dollars at the end of the third fiscal quarter year ago for a longstanding policy or cash balances are held an investment grade banks
spk_5: capital expenditures and cap wise pre publication cause for the nine month period where fifty four point six million dollars compared to forty one million dollars last year we expect cap and prepared span of between eighty five million and ninety million dollars this year primarily driven by investments in our education solutions busy
spk_0: miss and distribution operations
spk_1: in the current fiscal year we returned capital through our governance a tender offer for shares an open market repurchases as pure discuss through today we have required almost one point nine million shares returning a one million dollars to shareholders in the current fiscal year with more than half acquired in the third quarter alone to the sand or board of directors has approved a fifty million dollar increase in our current share buyback authorization additionally or board of directors has approved a twenty cents per share regular quarterly dividend to be paid in june the company's coming to continuously minoring in improving our capital allocation focusing on long term growth operational efficiency and returning access capital the shareholders had turned to our center results in children's book publishing distribution revenues for the third quarter of two hundred four million dollars and see the prior years reviews or two hundred one million off operating income decrease to one point nine million dollars compared to five million dollars and the prior period a book fairs operations led the emperor results despite the softening reach demand for children's books book fairs revenues increased to one hundred three point five million dollars from seventy six million dollars in the prior fiscal quarter fair cows on track to rise to about eighty five percent of pretend emeka levels from seventy two percent last year coming out a pandemic or operations are greatly improved and participation and are impressive book fares remain strong when we continue to innovate improve upon are offering to customers and distribution capabilities we do not see return to one hundred percent of impressive bears hell before the pandemic as many as far as we're not profitable but we will see an increase in fair count next year book clubs revenues and twenty seven point seven million dollars trail the prior year report revenues of forty point five million dollars the prior year period benefit from the shipment of backlog customer orders which shifted approximately eighty million dollars a revenue in from the second quarter or book revenues contains a trend lower
spk_0: but these operations are vital component of the company's outreach the teachers and students trade division sales trailed against the prior quarter with revenues of seventy two point eight million dollars compared to eighty four point five million dollars last year
spk_1: our trade channel continues to be impacted by the industry wide decline in retail market sales which are down about five percent product costs continue the trend higher as i previously discussed we could get a multiple titles on best lists are excited for the new dog man title my day pelkie twenty thousand please and didn't see which will be released at the end of march and addition were looking forward to the release of either the our series on apple tv plus on march thirty first education solutions revenues as
spk_5: seventy million dollars trail the prior revenues and seventy seven point two million dollars corley operating income with several hundred thousand dollars compared to thirteen point one million dollars in the prior schooling district magistrate content delayed purchasing as they folks on staffing and other matters which impacted our revenues specifically from straw
spk_1: optional products and programs reverence from our magazines plus business and digital subscription frogs remain consistent with the prior we can hear your best are lazy platform strategy and key partnerships that will further enhance our solutions model and product offering as a result we have brought on key staff with expertise to develop and transformers
spk_0: she platform which includes the integration of a july yeah no results for education solutions are largely dependent upon the fourth fiscal quarter and schools and their sustained came to delay ordering educational materials as could ever material impact on the company's fiscal year results
spk_5: international sagging revenues of fifty point nine million dollars trailed the prior peer revenues of sixty six point three million dollars with foreign exchange rate striving three point five million dollars of the decline to the strong us dollar operating loss and nine million dollars was unfavorable to the prior period operating loss of four point six million dollars international trade sounds were also impacted by the softness in children's book retail market driving the majority of decrease in our major markets similar dynamics they're driving higher demand for book fairs and the us are also drive a higher demand for book fairs internationally while much like in the u s
spk_1: book clubs revenues are declining international margins can hear you see improvement since we exit the unprofitable direct sales business in asia on allocate overhead costs a twenty one point three million dollars and decreased vs primary cause of three point two million dollars this decreases attributable to fair more photo litigation settlements are continuing efforts to tightly controlled discretionary spending improved efficiencies and are centralize distribute
spk_5: a facility also have to report their new tenant for the remaining broadway facing retail space in our headquarters property and so how has taken occupancy as of march on your a long term market rate lease we continue to market additional retail space on the mercy side of our headquarters as well as off space on are lower floors as a result of our performance year to date and our car forecast we have up there are guides for adjusted ebitda now estimated to be between one hundred and seventy five million dollars and one hundred and eighty five million dollars we now spec for your revenue to grow approximately four percent sales volumes in the critical fourth quarter of particularly education solution segment can vary dramatically
spk_1: responses update outlet we are tightly managing costs as a closer to year and taken the following actions were revised sales and marketing plans to accelerate sales and trim unproductive spending were book controls on discretionary spending including t any and are reducing spending and temporary labor
spk_2: we have also reviewed key corporate vendors and were appropriate we are negotiating are switching to lower our costs as peter as said our business remains fundamentally sound and we will continue to invest in our growth in issues and remain committed to return capital to our shareholders thank you for very time today i will now hand the call back to peter thank you can while we're disappointed to see quarter three results come in lower than expected on to reduce our outlook for quarter for scholastic a strong and resilient be navigated much more significant challenges than today shots and headwinds emerging stronger and holding our focus on our mission or long time off virginity and proud of the quick actions the team's taken to adjust spending and preserve margins in line with our adjusted topline outlook just as critically we continue to focus on driving growth and creating shareholder value for the long term we sustaining our investments in key drunk drivers like illiteracy platform while of holding our commitment to return substantial cash to our shareholders are optimistic about our future and look forward to sharing app plan for s y twenty four and the longer term on our next call on july
spk_1: the thank you all again for joining i call today jeff will conclude this afternoon's presentation for us thank you peter as a reminder we by questions to be directed to our i our mailbox investor underscore relations as galactic dot com
spk_0: we appreciate your time in continuing support

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