Scholastic Corporation

Thank you for standing by and welcome to today's program entitled Scholastic Reports Fourth Quarter and Fiscal Year 2023 Results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Jeffrey Matthews, Executive Vice President, Corporate Development and Investor Relations. Please go ahead.

Hello and welcome everyone to Scholastic's Fiscal 2023 Fourth 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 accompanying 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 these measures to the most directly comparable GAAP measures may be found in the company's earnings release and accompanying 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 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.

Peter Wark Thank you, Jeff, and good afternoon, everyone. Thank you for joining us. Scholastic finished fiscal 2023 strongly with fourth quarter operating income up 40% from the prior year quarter's record level on modest revenue growth. Full year results met or exceeded our revised guidance. I'm especially proud of the excellent performance management achieved across Scholastic last quarter in response to the cost and the selling headwinds that we've experienced this year and which caused us to revise our guidance in March. Thanks to quick actions to align spending with the revised revenue outlook and to unlock sales, including delayed opportunities in our education solutions division, margins and profits rose across all business segments in quarter four. The operational efficiencies that Scholastic has achieved since the pandemic, especially in our book fairs nationwide operations and in our centralized supply chain and distribution functions, also contributed to operating leverage and a considerable flow through of sales to profits that we saw in quarter four. Thanks to a strong Quarter 4, full-year adjusted EBITDA was $196 million, up from $189 million a year ago, and within our original guidance range of $195 to $205 million. Free cash flow was also robust relative to net income in fiscal 2023, even as we increased investments to grow and maintain our division's and to rebuild inventory levels post-pandemic. This afternoon, I'd like to review our fiscal 2023 results briefly before turning to our strategy and outlook for 2024 and beyond. Ken will then discuss our financial results in more detail, including our fiscal 2024 guidance. But first, I'd like to spend a few moments discussing the macro environment in which we operate. First, reading, literacy and learning have never been more pressing needs for our kids. Sadly, this was again recently confirmed by 9- and 13-year-olds' performance on the National Assessment of Educational Progress, or NEEB. Already low before the pandemic, these scores have fallen steeply since and are now at their lowest levels in decades. Reading and math achievement declined across all groups of children, but vulnerable children generally experienced bigger declines. These scores emphasize the critical need for children's books and for solutions to help kids and young students learn and love to read, something all parents, teachers, and leaders across our country can agree on. While demand for children's books and literacy is as strong as ever when you look across the many channels and stakeholders that buy them on behalf of kids, there continue to be short-term headwinds in the retail book-selling market. From March through May, Scholastic's fiscal quarter four, retail sales of children's and young adult books were down approximately 3%, according to NPD's book scan. We believe some of the year-over-year declines in the retail market largely reflect a return to pre-pandemic purchasing patterns. Relative to March through May of 2019, that's before the pandemic, the retail children's book market is still up by 13%. As we've said, even in periods of lower consumer confidence, as we're seeing currently, consumer spending on children's books is typically less cyclical than other areas of discretionary spending. In fact, in contrast with retail, we've been encouraged to see strong growth in participation and same-fare sales in our book fairs, as I'll discuss in a moment. Third, sales of supplemental instructional materials remain slow in the fourth quarter, another headwind we've navigated this year. School and district administrators continued to manage their immediate challenges, including staffing. Fourth, the steep rise in paper, manufacturing, freight and shipping costs that we saw in late calendar 2021 and early 2022 are now largely reflected in our inventories and prior year results. We're cautiously optimistic about potential improvements in freight and shipping costs. Any disruption to service by our national shipping partners, one of which is in the process of renegotiating long-term labor contracts this summer, could materially impact our shipping costs and revenues overall, however. With that, I'll provide a high-level overview of our fourth quarter and fiscal 2023 results. In the children's book segment, revenues increased 5%, continuing to outperform softness in the children's book market due to strong results in our school book fairs and multiple trade bestsellers. Operating income increased 25%, driven by higher revenues, operating leverage, and continuing improvements in operational efficiencies. Bookfair's revenues grew 12% in the quarter and were up 29% for the year, benefiting from increased fare count, which reached approximately 85% of pre-pandemic levels. Strong growth in revenue per fare was also a key factor contributing to growth and operating leverage in the quarter and the year. In line with recent quarter's trends, book clubs' revenues declined compared to the prior year period, driven by lower teacher participation. In our trade channel, sales declined in the quarter and the full year, in line with overall softness in the retail market. This dynamic impacted Batlist titles and was partially offset by best-selling new titles in Quarter 4, including number 11 in Dave Pilkey's series Dogman, 20,000 Fleas Under the Sea, as well as Hunger Games titles in advance of the November release of the Ballad of Songbirds and Snakes movie. Scholastic Entertainment continued to be a key component of our strategy to build must-read series and franchises last year. We successfully launched Eva the Owl on Apple TV Plus in quarter four, a Scholastic Entertainment production based on our New York Times best-selling book series, Owl Diaries. We also launched new licensing programs for Eva and our Emmy Award-winning Stillwater series, also streaming on Apple TV Plus. Last quarter, education solutions delivered higher sales and substantially improved margins. Strong management of the sales pipeline in quarter four allowed us to partially overcome softness in supplemental curriculum sales earlier in the year. The strong fourth quarter also indicated the growing size and contribution of our summer reading business and the seasonal importance of quarter four. In our international segment, revenues declined as the strong dollar negatively impacted foreign exchange, but profits rose in quarter four, largely driven by the exiting quarter one of the unprofitable direct-to-consumer business in Asia. As we begin fiscal 2024, we're focused on executing an integrated strategy to drive growth, impact, and shareholder value creation over the following years. At the same time, we protect margins and sustain the growth we achieved in fiscal 2023. I'd like to discuss the four pillars of this strategy as context to our fiscal 2024 and long-term plan. The first pillar of our overall strategy is focused on leveraging the strengths and operating leverage of our market-leading children's book businesses to achieve sustainable long-term revenue growth and higher earnings. Scholastic's content and direct access to customers provide a unique strategic position to further grow our share of the children's book market. Just as exciting, we have an opportunity to grow the market and bring the power and joy of reading and books to more kids. Strong operating leverage and over a billion dollars in segment sales, as we saw in fiscal 2023, means that modest top-line growth in this business can generate substantial growth in the company's overall earnings and free cash flow. Scholastic's children's book segment is coming off a strong year, especially considering industry-wide challenges in the retail market. In addition to our continued best-selling publishing, a bright spot for Scholastic and the industry has been our school book fairs, which delivers high-impact events focused on building book access, choice, and reading environment. The combination of Scholastic's book fairs and book clubs into the newly formed school reading events division is expected to be a key driver of future growth in our children's book segment. Over the past two years, new customer-centric strategies and operational improvements have transformed book fairs, resulting in higher participation, strong growth in revenue per fair, and higher operating contribution. We've also begun implementing these strategies and operational improvements in book clubs since integrating with fairs. We're optimistic that our integrated school reading events will remove structural barriers and leverage synergies to more profitable long-term growth and enable a more holistic approach to serving our kid and adult customers. Scholastic's high-quality, engaging children's and young adult publishing, including some of the biggest titles and series in history, is another part of our strategy to profitably grow our children's book segment. In fiscal 2024, we're focused on continuing to develop unrivaled content, including driving revenue and building on our tentpole series and titles as we acquire and develop our next wave of hits. Following the strength of Dave Pilkey's latest Dogman book, we're excited about a new title in another of his series, Cat Kick Comic Club, later this fall. The 25th anniversary in September of the publishing of Harry Potter will create an opportunity for a new generation of kids to discover the series, while The Hunger Games prequel movie is expected to drive backlist sales of the series. With new titles to be published this year from best-selling graphic novel series, including Amulet, Bone, and Heartstopper, we look to grow our commanding market share in that market too. We're also excited to continue to innovate the multi-platform model with Zombie Season, a heart-pounding new series that we're launching in partnership with Roblox. We're one of the first major publishers to do so. Scholastic has a history of innovation, most notably with the 39 Clues, which has over 17.5 million copies in print. As we've discussed, Scholastic Entertainment contributes to long-term growth in children's books by creating a virtuous circle of content from page to screen to merchandising and then back to page. In October, Disney Plus will release the live-action Goosebumps series starring Justin Long. This project is a new interpretation of our best-selling Goosebumps series. It's already generated a lot of buzz, and we're excited about the many potential new readers who will discover the books through it. The second pillar of Scholastic's strategy is to invest to grow our digital sales in education solutions. with new blended literacy programs which combine digital and print components. They'll build on the long-term strengths of our profitable print content businesses. Here again, our opportunity is both strategic and financial. Scholastic's strong reputation in schools and with teachers, our unique reading and literacy content, And our sales and distribution capabilities position us to grow our blended sales with new solutions that address the critical and growing need to improve reading skills. While investments to build new products and new platform capabilities that enable future products and reinvention of existing ones impact short-term earnings, as we saw in fiscal 2023, and expect to continue in fiscal 2024, we're optimistic that over the long term, they will result in new, faster-growing, higher-margin revenue streams on top of our profitable core print offerings. Looking to fiscal 24, we're very excited to be in the market with Ready for Reading, which was launched last month and is already generating substantial interest. Ready for Reading is a simple-to-implement, speech recognition-enabled print and digital K3 foundational reading phonics program, aligned with science-based approaches to literacy. Ready for Reading leverages core IP from Learning Ovations, the edtech we acquired last year, that's built on 10 years of efficacy research in reading instruction. It's also the first blended program to launch under our new strategy for this business. Of course, we're keenly focused on protecting and growing Scholastic's strong print-based education offerings, including our summer programs, classroom library connections, state-based partnerships, and programs with community-based organizations. Not only are they profitable and highly strategic, leveraging Scholastic's unique content and distribution capabilities, these programs provide access to engaging books at school and at home for millions of kids, many of whom could not afford them otherwise. These products diversify Scholastic's customers beyond the limits of school and district budgets while expanding our reach and impact. The third pillar of our strategy is continuing to improve operating efficiencies across the company, both domestically and internationally, including holding recent gains achieved during the pandemic. As we've discussed in previous calls, Scholastic is a much more efficient organization today, both in our centralized functions and in our divisions, compared to three years ago before the pandemic. These gains, in particular in our overheads and fixed costs, enable the strong operating leverage and earnings growth we saw last quarter. Even as we invest in new capabilities to support our long-term strategy, we're committed to protecting the Hartford gains that we've already achieved. Looking ahead, we're pursuing further opportunities to lower costs and improve efficiencies in fiscal 2024. These include the integration of school reading events, a reorganization of our Canadian book clubs, centralizing some of the go-to-market capabilities across the company, and investments in process improvements in our manufacturing and distribution functions. Last, like companies across many industries, we're excited about the potential to better, more efficiently serve our customers with generative AI, for example, by integrating it into customer service and marketing processes. With the recent advances in generative AI, more remains to be seen in this area. Finally, the fourth pillar of our strategy is continuing to use Scholastic's strong free cash flow and balance sheet to invest in profitable growth and to return capital to shareholders, thus driving sustainable growth and shareholder value. In fiscal 2023, Scholastic invested to grow our education solutions business, including acquiring learning innovations, increasing spending on new products and investing in new go-to-market capabilities. which have impacted near-term margins. We intend to continue this strategy while also making strategic investments to profitably grow our children's book segment, generate income from our real estate assets, and build new revenue and efficiency opportunities in our supply chain and distribution. Last year, Scholastic returned over $160 million to shareholders through the regular dividend and share repurchases, another sign of our renewed focus on deploying capital for shareholder returns as well as for growth. Looking ahead, Scholastic is committed to continuing to return to our shareholders capital that's not needed to maintain a secure balance sheet and to invest in growth. To this end, yesterday, the Scholastic Board authorized a $100 million increase in our open market share buyback authorization. I'm optimistic that the strategy that I've just laid out provides a compelling path for Scholastic to grow profitably and sustainably for the long term, meeting the needs of our stakeholders and balancing investment and profitability now and into the future. Just as importantly, I'm confident that the core markets that Scholastic serves are sustainable and the mission we pursue will be relevant for many years to come. With that, I'll turn the call now over to Ken to review our fiscal 2023 results and fiscal 2024 guidance.