Scholastic Corporation

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.

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.

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.