9/21/2023

speaker
Operator

Thank you for standing by, and welcome to today's conference entitled Scholastic Reports First Quarter Fiscal Year 2024 Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. As a reminder, today's program is being recorded. One moment, and I will go ahead and and introduce our host for today's program, Jeff Matthews, Executive Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

speaker
Jeff Matthews

Hello and welcome everyone to Scholastic's Fiscal 2024 First 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 investor presentation on our IR website, investor.scholastic.com, which you may download now if you've not already done so. We'd 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 reconciliations of those measures to the most directly comparable GAAP measures, may be found in the company's earnings release and company financial tables. Filed this afternoon on a 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. 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 Warrick to begin this afternoon's presentation.

speaker
Peter Warrick

Thank you, Jeff, and good afternoon, everyone. We're happy you're joining us. Scholastic began fiscal 2024 solidly, excited and well-positioned for the year's back-to-school season, which represents another opportunity for Scholastic to work with families, educators, and kids to address the critical needs for literacy, reading, and stories. We continue to execute on our integrated strategy to drive growth, impact, and shareholder value creation over the coming years, while we protect margins and sustain the growth that we achieved in fiscal 2023. Last quarter, we continued to invest in strategic growth initiatives, including in go-to-market and blended product development capabilities in education solutions, as we took further steps to ensure Scholastic is structured for future growth, executing reorganizations in our U.S. and Canadian book clubs and announcing key leadership changes. As we expected and previewed on last quarter's call, first quarter's operating loss grew from a year ago, reflecting these ongoing and one-time investments, as well as the changing seasonality and timing of education revenues and planned spending ahead of expected growth in school reading events, our recently combined book fairs and clubs division. As a reminder, Scholastic typically records operating losses in the first and third quarters, which coincide with summer and winter school vacations in the Northern Hemisphere. We generate the greatest contribution in the seasonally important second and fourth quarters. Based on quarter one results, we're affirming our fiscal 2024 guidance for revenue growth of 3 to 5% and adjusted EBITDA of 190 to $200 million, excluding the impact of one-time charges of $7 to $10 million related to restructuring and cost savings activities. Our confidence in our outlook is also demonstrated by our continued share repurchases In total, last quarter we returned over $42 million to our shareholders. This afternoon, I'd like to review our first quarter results and outlook for the rest of the year. Ken will then discuss our financial results in more detail. As I've done on past several calls, I'd like to begin with some comments on the macro environment in which we're operating. First, reading, literacy, and learning remain a top focus for families, educators, and leaders across our country, and something that everyone can agree on, even as we're seeing increasing debate across our society, including around education policy and book choice. Scholastic continues to be uniquely positioned to respond to these needs. As we've done for more than 100 years, we will continue to focus on serving kids, families, and educators. Second, the global retail book selling market continues to revert year over year to pre-pandemic levels, as reflected in softness at retail and continued reductions in backlist inventory by booksellers. Based on NPD Bookscan data, sales of children's and young adult books in the US declined 8% during our first quarter. Notably, sales of our front list titles have been strong, as I'll discuss in a moment. As we've said, despite short-term softness in the trade channel, our confidence in overall demand for children's books remains strong, bolstered by the positive same-fare sales we saw last year in book fairs. Third, having lapped the steep rise in paper, manufacturing, freight, and shipping costs that we saw during the pandemic, these costs, especially manufacturing and freight, have begun to fall. As Ken will discuss, this is first benefiting our inventory purchases and free cash flow, and will flow through operating margins later this financial year. With that, I'll provide a high-level overview of our first quarter 2024 results. In its seasonally smallest quarter, revenue in the children's books segment declined, driven by lower results in our consolidated trade channel. This primarily reflected industry-wide softness in the retail market, as I just described. Multiple front-list bestsellers in the quarter helped partly offset this. Some standout successes included This Winter by Alice Oseman, the best-selling author of the Heartstopper series, The Bad Guys in Let the Games Begin by Aaron Blaby, and the official Harry Potter cookbook. We also had strong sales of the new paperback edition of The Ballad of Songbirds and Snakes, Suzanne Collins' prequel to the Hunger Games series, ahead of the highly anticipated release of that movie this November. Looking ahead at the fall and spring, we have a strong lineup with new titles in Dave Pilkey's Dogman and Cat Kid comic club series, a new Heartstopper title, and Harry Potter, including the interactive MinaLima edition of Harry Potter and the Prisoner of Azkaban and the Harry Potter Wizarding Almanac. We're also looking forward to the release of the new Goosebumps TV series on Disney Plus and Hulu on October 13th. The series, which was developed and co-produced by Scholastic Entertainment, already has a lot of buzz, and Disney is supporting its launch with extensive marketing. We expect it will introduce a whole new generation of readers to this beloved Scholastic series of books, which has sold over 400 million copies to date and is the second best-selling kids' series ever, second only to Harry Potter, which has sold over 600 million copies worldwide. This is another success by the Scholastic Entertainment team, whose focus is on building global brands and franchises through the virtuous cycle from page to screen and merchandising and back to the page. By developing Scholastic book titles and intellectual property into compelling, viable media projects, we can partner with studios and streaming platforms both domestically and internationally to bring our brands to kids and families around the world. Goosebumps comes on the heels of the Peabody and Emmy award-winning Stillwater series that Scholastic Entertainment co-produced for Apple TV+. Now, turning to our unique school-based distribution channels. Scholastic book clubs and fairs generate minimal revenue during the first quarter when schools are out, so the year-over-year trend last quarter is not meaningful. over the past two years we've transformed book fairs with new customer-centric strategies and operational improvements which have resulted in higher participation strong growth in fair count and revenue per fair and higher operating contribution for back to school we've now begun implementing these customer-centric strategies and operational improvements in book clubs we remain optimistic about continued growth in book fairs this year at the same time Our plan is to strategically transition book clubs to a smaller, more profitable core business this year upon which we can grow going forward. Turning to education solutions. Last quarter, we continued investing to build capabilities and to focus the organization around executing our blended learning strategy under new leadership. First quarter sales were lower year over year as expected. This reflected two things. First, the shifting seasonality of this business is increasingly driven by the strength of our summer reading programs, which mostly benefit quarter four. And second, the timing of revenues related to our growing state sponsored programs, which vary year to year and are not typically correlated with the school year. We've also seen declines in supplemental instructional sales over the past few quarters related to the shift in prevailing approaches to literacy instruction and for which we are in the process of realigning our key product lines. We now have a clear long-term vision to grow our sales in literacy-focused blended learning programs like our newly launched Ready for Reading, which combine digital and print components. Our opportunity is to execute this long-term growth strategy while protecting and building on the long-term strengths of our profitable print content businesses. In addition to continuing to build our long-term capabilities, last quarter we took actions to optimize the organization and operating model. I'm delighted to have appointed Beth Polcari as our new President of Education Solutions, who will continue to advance this vision. Beth is a proven leader, including most recently as President of Scholastic's International Division, which she led through the pandemic and oversaw significant operational improvements, especially in Scholastic's growth markets. Before that, she oversaw Scholastic's classroom magazines, digital subscriptions, and teaching resources businesses, all of which are key foundations of our education solutions business today. Beth also led key digital growth initiatives, including the development of Scholastic Literacy Pro. Beth's leadership, deep knowledge of the education market, and our businesses and strong operational focus will be invaluable as Education Solutions enters its next chapter. Turning last to our international segment, which offers a significant long-term opportunity for Scholastic, both strategically, as we build global publishing franchises, such as we've done with Aaron Blaby's Bad Guys, and financially, as we grow our scale to further improve operating efficiencies and drive profitable growth. Last quarter, we completed a reorganization of book clubs in Canada, in line with actions we took in the US business, We're confident this will drive greater operational efficiencies beginning later this year. Softness in the global retail book market, however, continued to depress our major markets, particularly Canada and Australia, which impacted segment results. As we also announced last month, our CFO, Ken Cleary, has taken on responsibility for our international division and will be transitioning to become the full-time president of international as soon as the company appoints a successor for its current role as chief financial officer. We have retained a nationally recognized search firm, which has begun the process of identifying and hiring a growth-oriented CFO to partner with our leadership team to deliver on Scholastic's long-term strategy. This is a great opportunity for Scholastic and for Ken. Ken has over 15 years of service in Scholastic's finance organization. Under his leadership as CFO, Scholastic successfully navigated the pandemic and dramatically increased efficiencies across our operations. He's an ideal successor to Beth as President of International, given his deep knowledge of our domestic and international businesses. I'm confident that Ken will be a highly effective partner helping the company's international subsidiaries realize their full potential. So, now I will turn the call over to Ken.

speaker
Jeff

Thank you, Peter, and good afternoon, everyone. Today, I will refer to our adjusted results for the first quarter, excluding one-time items in fiscal 2024, unless otherwise indicated. Note that we recorded no one-time items in fiscal 2023. please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter discussed earlier, we are excited for this year's back-to-school season. After a strong finish to fiscal 2023, results in our seasonally quiet first quarter were in line with our expectations, including a greater year-over-year operating loss. Over the past three months, we have made progress and executed organizational improvements across all three of our business segments. I am proud of our team's hard work and preparations ahead of the back to school season. These actions have positioned us for upcoming fall and spring seasons and we look forward to continuing our progress next quarter and beyond. Turning to our consolidated financial results. First quarter revenues decreased 13% to $228.5 million. Operating loss in the quarter was $92.8 million, down from $58.1 million from the prior year period. Net loss was $69.5 million, compared to $45.5 million in the prior year period. And adjusted EBITDA was a loss of $70.6 million from $35.6 million a year ago. Loss per diluted share was $2.20, compared to a loss of $1.33 last year. Year-to-date free cash use was $57.8 million, improving from $76.5 million in the prior year period. As discussed, first quarter's operating loss grew from a year ago as expected. After a record-generating operating income in the fourth quarter, we anticipated these results as we continued to prioritize strategic investments and growth initiatives and execute on our plan in the school reading events business. Additionally, our education solutions business saw lower sales driven by the timing of revenues related to our growing state-sponsored programs and the shifting seasonality of sales to be more Q4 weighted. As Peter explained, we typically record an operating loss in our first and third quarters due to the highly seasonal nature of our business. We remain positive about the remainder of the year and continue to focus on protecting margins and sustaining growth in fiscal 2024 as we execute on our long-term growth and shareholder value creation strategy. Now turning to our segment results. In children's book publishing and distribution, revenues for the first quarter decreased 18% to $102.8 million. Segment operating loss increased $11.4 million from the prior year period to $41.5 million. Segment performance in the first quarter trailed the prior year, primarily driven by continued softness in the retail book market and planned spending ahead of expected growth in the school reading events business. Book fair revenues declined 4% to $27.3 million in the quarter. Revenues and profits are not meaningful as schools are largely not in session in the summer. As noted on our previous earnings call, we expect participation at our in-person book fairs to remain strong this school year, and fair count is on track to reach approximately 90% of pre-pandemic levels, up from 85% in fiscal 2023. Book clubs revenues of $2.6 million were down versus the prior year period revenues of $6.3 million, again, in a very small quarter for this division. Book clubs underwent a successful reorganization this quarter as they were combined with fairs, which resulted in one-time severance recorded in overhead. The team has begun to implement new customer-centric strategies as we reduce this business to a more profitable foundation to build upon. Overall, we are confident that the school reading events business is well positioned for a successful back-to-school season. Consolidated trade revenues were $72.9 million in the first quarter, trailing prior year period revenues of $90.1 million. While our best sellers continue to perform well, trade continues to be impacted by headwinds in the retail book-selling market impacting sales. As Peter discussed, despite the near-term book-selling environment, we are excited about the many front-list titles we are publishing later this year, as well as the film and streaming series that are launching. Lower media revenues contributed to the segment revenue decrease as the company completed the delivery of episodes associated with the production of the animated series, Eve of the Owlet, in fiscal 2023. Education solutions segment revenues were down 10% to $66 million in the first quarter, reflecting ongoing trends in timing and seasonality of customer buying patterns. Operating loss increased $14.4 million to $18.7 million compared to the prior year period in line with our expectations. This was driven by lower revenues and continued investment in growth opportunities to become a provider of blended learning solutions or remaining focused on protecting our strong literacy offerings, which are a pillar of Scholastic's long-term growth strategy. As Pierre described earlier, we completed actions in the first quarter to streamline the Education Solutions Organization and adjust the operating model under new leadership as the business executes on our blended learning strategy. This resulted in one-time severance recorded in overhead. International segment revenues of $57.2 million in the first quarter trailed the prior year period revenues of $65 million. a $1.4 million year-over-year impact of unfavorable foreign currency exchange and lower revenues of $1.6 million due to the fiscal 2023 Q1 disposition of the direct sales business in Asia contributed to this decline. Excluding these factors, international revenues were down $4.8 million, reflecting lower revenues in major markets, specifically Canada and Australia, as softness in the retail book-selling market continued to impact global trade sales. Segment operating loss increased $3.5 million to $7 million, partly reflecting lower revenues and operating pressures in Canada. We expect the reorganization of book clubs in Canada, which resulted in one time severance, to drive greater operating efficiencies in the coming quarters. Unallocated overhead costs of $25.6 million in the first quarter increased from $20.2 million in the prior period, primarily driven by higher employee related costs. As discussed last quarter, we have now rented all of our first floor retail space at our own headquarters building in New York. We're currently marketing floors two through four for outside tenants. As we now disclose in our findings with the SEC, we recognize rental revenue of $2.5 million in the first quarter. As a reminder, this was previously recorded as a benefit in SG&A in the prior year period. On the approximately 26,600 square feet leased as of today, we expect annualized straight line rental revenue to total approximately $9.9 million in fiscal 2024. Now turn to cash flow on the balance sheet. Net cash used by operating activities was $38.1 million compared to $60.3 million in the prior year. Lower inventory purchases in the first quarter compared to a year ago benefited working capital, reflecting lower manufacturing and freight costs, as well as low purchase volumes compared to a year ago, when the company replenished inventory levels post-pandemic to meet demand and mitigate shipping delays. With a significant improvement in lead times for product, we're able to manage purchases substantially closer to our demand this quarter, resulting in sufficient inventory on hand and lower spend. We expect our cost of product per unit to decline in fiscal 2024 from the prior year, with this benefit appearing in the P&L in the second half of the fiscal year. Free cash used in the first quarter was $57.8 million, improving from $76.5 million in the prior year period, reflecting lower working capital requirements, partly offset by higher capex and pre-publication spending on new products, growth initiatives, and one-time severance costs. At the end of the quarter, cash and cash equivalents net of total debt was $119.9 million compared to $218.5 million at the end of fiscal 2023. In addition to increasing growth investments, we continue to return capital to shareholders in the first quarter through our regular quarterly dividend and open market share repurchases. We repurchased 818,000 shares last quarter for $36.2 million. Together with our regular dividend, we returned over $42 million in the first quarter, as Peter mentioned. We remain consistent in our capital allocation priorities. We will pursue opportunities to leverage our balance sheet and deploy capital by, first, investing in growth opportunities. Second, containing a strong and efficient balance sheet and third returning excess cash to shareholders to enhance their returns as we look ahead to the rest of the year we are affirming our fiscal 2024 guidance as peter has said we continue to expect revenue growth of three percent to five percent and are targeting adjusted ebitda of 190 million to 200 million dollars this excludes the impact of one-time charges related to restructuring and cost savings activities of seven million to ten million dollars of which we incurred $6.3 million in the first quarter. Based on our current outlook for fiscal 2024 CapEx and pre-publication spend of $115 million to $125 million, compared to $88.9 million in fiscal 2023, we now expect full-year free cash flow of between $55 and $65 million. Thank you for your time today. I will now hand the call back to Peter for his final remarks.

speaker
Peter Warrick

Thank you, Ken. This past quarter, our team made good progress and built a solid foundation for the remainder of fiscal 2024. After first quarter results that were in line with expectations overall, we are affirming our guidance and looking ahead. We're positive about fiscal 2024 and our multiple long-term opportunities to grow our business and impact, addressing kids' pressing need for reading, learning, and stories. Thank you very much. Let me now turn the call over to Jeff.

speaker
Jeff Matthews

Thank you, Peter. We appreciate everyone's time today and continuing support. With that, we will open the call for questions.

speaker
Operator

Certainly, and ladies and gentlemen, if you do have a question at this time, simply press star 11 on your telephone. If you wish to remove yourself from the queue, simply press star 11 again.

speaker
spk01

One moment for, as we tabulate our queue. Once again, if you have a question, please press star 11. One moment for our first question. And our first question comes from the line, Brendan McCarthy from Sedoti. Your question, please.

speaker
Brendan McCarthy

Yes, thank you for taking my question. I think I wanted to start off at the trade channel sales and just the general, the retail market in general. I'm just wondering if you can kind of talk about what you're seeing in the industry versus your back and front list sellers. It looks like, you know, obviously you mentioned it's kind of reverting to the pre-pandemic normal, more normalized levels, but I was also wondering if you could provide some insight into, you know, when you might think the timing of that might play out.

speaker
Peter Warrick

Yeah, it's Peter here. I mean, there are two things going on at the moment, the first of which is that we're seeing that, hang on, Yeah, sorry, it's Peter here. The first thing that we're seeing is that sales are soft going out of the door. And the second thing we're seeing is that the larger inventory purchases, which many booksellers have made during the pandemic, mean that restocking has not been happening at the same level as before. This has been coming for the last few months and parts of this year. But we see this, I think, as reverting to more normal sort of activities in the trade channel once the full impact of the pandemic is through. And indeed, we're beginning to see some stronger elements of that, you know, post the quarter. Certainly the last weeks of August, which is our third month, and now in September are encouraging. I think also with the trade, one's position in the trade market is that a lot depends too on the new publishing that you're doing. And whilst our trade channel was soft during the first quarter, we've got much more in terms of our publishing coming in quarter two. So we would expect quarter two to be a really quite strong trade month. And we don't really have any major concerns about our overall trade forecast for the year as a whole. The other piece to bear in mind is that we can see a more complete picture really of book buying because of our school book fairs in particular. And school book fair buying has been very strong. It was strong through the spring season this year. And in terms of fairs booked, for the fall season, that all looks very promising and strong as well. So I think one's got to look at this in terms of the totality of the market. We're in a particularly good position to see the totality of the market because of the volume of books which are actually sold through the book fairs and book clubs which are not captured by book scams.

speaker
Brendan McCarthy

Great. Thank you, Peter. I was also wondering as a follow-up, do you think it's fair to say is inflation still having an impact on consumer purchasing patterns as it pertains to trade channel sales?

speaker
Peter Warrick

Well, we haven't particularly seen that. I think probably not is the answer. Again, we can look at things like revenue per fare as an indication of kids and parents purchasing. And we saw throughout our last fiscal year, and particularly in spring this year, that actually the revenues per fair have been strong and stronger than pre-pandemic. So I think it's not that particularly. I think one's also got to think of this in terms of the, as I said earlier, the totality of what goes on in trade and how how parents and children actually buy kids' books. And so I think that we feel reasonably, I have to say, we feel comfortable about our trade publishing and trade forecasting because in many ways, one year is never exactly the same as the prior year because of timing of new titles. And so that's not a cause of concern for us at all.

speaker
Brendan McCarthy

Got it. That's helpful. One question on the education solution segment. I know you mentioned there was some impact from the timing of state-sponsored programs. I was just wondering if you could go into detail about that specific timing.

speaker
Jeff

Hey, Brandon, this is Ken Cleary. How are you? So, yeah, so there was, you know, we have a very large contract. with NWRI and the state of Florida. And part of that called for some billings that we don't have this year. So, you know, we continue to grow our student base there and we continue to reach out to more students because there's an awful lot more students in Florida that are eligible for this program and we're investing in marketing to reach these students. And therefore, the timing, really the beginning of the year cycle starts, I believe, in July and continues through the next July. So this quarter really caught the beginning of the year cycle for that. But the idea is that we're looking to increase participation in that program. And to that end, you know, we have incremental opportunities in terms of it's now open to kindergartners and pre-K as well. So, you know, we're very encouraged by our sponsored programs, particularly in Florida, and that's what you're seeing impacting in the quarter, but also elsewhere as we continue to try and replicate this model and similar models in other states and through either state sponsors or other sponsors in general.

speaker
Brendan McCarthy

Yeah, thank you, Ken. One more quick question for me. I just noticed overhead costs were up year over year, and that was driven by employee-related costs. Is that just compensation?

speaker
Jeff

Yeah, some of it's higher headcount, but a good bulk of it is higher utilization of medical expenses as well. And again, because our medical expenses... don't particularly time out with our fiscal year. Our medical year is a calendar year and our fiscal year is a full year. We're still working to look at those accruals and understand exactly where they are. So right now, this is what we have in there, but we're definitely seeing higher utilization post-pandemic of medical costs, but more to come as the year progresses. We'll certainly have it ironed out by the time we get to the end of the year.

speaker
Brendan McCarthy

Great. Thank you, Ken. Thank you, Peter. That's all from me.

speaker
Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.

speaker
Peter Warrick

Thank you everyone for joining today's call and for your continued support. I'd like to thank again all of Scholastic's employees for their hard work and preparation ahead of the back to school season. We're positive about our plan for fiscal 2024 and about the long-term opportunities for Scholastic as we continue to execute on our strategy this year and beyond.

speaker
Operator

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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