Scholastic Corporation

Good day and thank you for standing by. Welcome to the Scholastic Corporation Fiscal 2024 Second Quarter Earnings Call. 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, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeffrey Matthews.

Thank you, and hello, and welcome, everyone, to Scholastic's fiscal 2024 second quarter earnings call. Today on the call, I'm joined by Peter Wark, our president and chief executive officer, and Ken Cleary, our chief financial officer and acting president international. As usual, we posted the accompanying investor presentation on our IR website at investor.scholastic.com. which you may download now if you have 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'll be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliations of those measures are the most directly comparable GAAP measures They were 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 call, please send them directly to our IR email address investor underscore relations at scholastic.com. And now I would like to turn the call over to Peter Wark to begin this afternoon's presentation.

Thanks, Jeff, and good afternoon, everyone. We appreciate you joining us. Scholastic executed solidly in our second quarter during the important back-to-school season in the Northern Hemisphere. Our school reading events and education divisions, while progressing their plans, continued to demonstrate Scholastic's unique capabilities to give tens of millions of kids access to engaging, high-quality books. Scholastic's trade, publishing, and entertainment teams continued to create and publish best-selling books and highly-rated content and IP for the company's own channels, as well as retailers and third-party ones, fulfilling the second pillar of Scholastic's unique integrated publishing and distribution strategy. With kids back at school and parents and educators refocused on the importance of reading and learning, Scholastic's mission is as relevant as ever today, even in the more complex environment in U.S. schools in which we currently find ourselves operating this year. Last quarter, we also took actions to create long-term value, continuing our investment in growth initiatives and returning over $58 million to shareholders through share buybacks and our dividends. Quarter 2 profits remained steady on modestly lower revenues. These results, however, came in below our expectations for profit growth as a result of external factors, a trend we now forecast to continue for the remainder of this school year. As a result, we've adjusted our fiscal 2024 guidance and have taken steps to target additional revenue opportunities and align spending in the second half of the year. We remain positive about long-term outlook for growth and impact as we continue executing on our strategy, investing in content and capabilities to drive growth and returning capital to shareholders, including under an expanded share repurchase authorization announced today. This afternoon, I'd like to review our second quarter results and updated outlook for the rest of the year. Ken will then discuss our financial results in more detail. I'd like to begin with some comments on the macro environment in which we're operating. First, as I referenced a moment ago, compared to a year ago, the environment in U.S. schools is currently more complex and challenging, reflecting growing polarization in our society and politicization of schools and school boards, higher rates of absenteeism, and chronic teacher shortages. Together, these factors have put greater demands on schools and teachers, including through expanded restrictions on educators, parents and kids' ability to choose books, and mandates changing how kids are taught, especially with respect to literacy instruction. Taking the longer view, however, it's clear that reading, literacy and learning are acute priorities that families, educators and leaders all agree on. independent of geography or party affiliation. Scholastic remains uniquely positioned to respond to these needs today and in the future. We'll continue to focus on serving all kids, families and educators, as we've done for the past 100 plus years. Second, we saw signs of a modest short-term slowdown in consumer spending growth for a period this fall. relative to prior year and expectations for our school-based channels. During recent weeks, we've seen signs of a rebound. This pattern is in line with trends reported by some retailers this fall. Retail sales of children's and young adult books also declined 2% during our second quarter versus a year ago, according to Bookscan. The retail adult and kids' book market is still up significantly compared to the same period in 2019. So we see this dynamic largely as a reversion to pre-pandemic growth trends. Third, and positively, we continue to benefit from lower costs of paper, manufacturing, freight, and shipping versus a year ago. This is seen in our inventory purchasing already and therefore cash flows and will be reflected in operating costs Turning to our results, quarter two is the seasonally largest quarter for the children's book segment. Segment revenue declined 6%, reflecting the planned resizing of book clubs, as well as lower expected production revenue from Scholastic Entertainment, which is reported in consolidated trade. Excluding Scholastic Entertainment, consolidated trade sales rose 3%. Fair sales grew 1% to 242 million in quarter two, surpassing the previous year's record and demonstrating their enduring presence in the U.S. education system. Fair count rose as planned. Revenue per fair rose modestly on the same fair basis, but declined on average due to mix reflecting the addition of mostly smaller fares to the fall schedule as we increase fare count. Cancellation rates improved year over year. Over the past two years, we've transformed book fares with new customer-centric strategies and operational improvements, which have resulted in higher participation and transaction sizes, contributing to higher revenue per fare. Average revenue per fare or RPF, remains close to record levels, reflecting the progress we've made. However, this school year, we have seen RPF grow more slowly than last year for our expectations for the current one, dampened by the macro factors in schools and consumer spending that I just described. Largely as a result, FAIR's profitability did not meet expectations because RPF contributes strongly to operating leverage and expanding margins. Looking ahead at the second half of the school year, we largely expect fall trends to continue into the spring, as is the historical pattern. In response, however, we've made adjustments to our merchandising strategy in fairs for the spring, which we're optimistic about. We also remain confident in achieving near 90% of pre-pandemic fair counts this year. We remain focused on innovating and improving the book fair host experience with new tools like our updated online fair preview and improved online restock process, while maintaining our focus on kids with high-quality, kid-centric merchandising. In our school book clubs, this year is a transitional year as we integrate clubs and fairs into a combined school reading events division. Last quarter, clubs' gross profits remained approximately level with prior year, while we right-sized the business. Revenues declined 44% with planned reduction in unprofitable offers and promotional spending, resulting in lower orders. Participation and spending by teachers and families, however, were also lower than expected, delivering lower revenue per order, echoing the macro trends we're seeing elsewhere. We see improvements in response rates as we continue to iterate our redesigned club flyers, which should benefit order numbers in the second half of the year. That said, we also expect to see the impact of lower teacher participation and spending in the fall to carry over into club spring results. Scholastic's trade publishing continued to execute strongly in a retail book selling market that was down slightly year over year, as I just described. This primarily impacted backlist titles. Very encouragingly, Scholastic's new frontlist titles continued to dominate and expand our presence on bestseller lists, achieving 117 weeks cumulatively on the New York Times middle grade bestseller list and 88 weeks on the Times young adult bestseller list. We also maintained our leading presence on the New York Times graphic books and manga and children's series bestseller list. As best-of-year lists are published, scholastic titles are found throughout. Among our top sellers last quarter, the interactive edition of Harry Potter and the Prisoner of Azkaban and the Harry Potter Wizarding Almanac both regularly ranked on bestseller lists. Cat Kid Comic Club No. 5, Influencers, from Dave Pilkey, which shipped during quarter two and went on sale on November 28th, became the number one best-selling book on BookScan across kids and adult categories. Its success has lifted backlist sales of Dave's Dogman and Captain Underpants series too. The new paperback edition of The Ballad of Songbirds and Snakes, Suzanne Collins' prequel to the Hunger Games series, also performed strongly, driven by the highly anticipated movie release last month. Once again, Scholastic benefited from the virtuous circle from page to screen and back to page, which has helped build many of our mega publishing franchises. Looking ahead, we're excited about our publishing plan for the spring, which includes new titles in Dave Pilkey's Dog Man and Alice Oseman's Heartstopper series, both of which are hugely popular, as well as a new title from New York Times bestselling adult and young adult author Alan Graz, and new graphic novels in our Wings of Fire Babysitter's Club, and Amulet series. The new live-action Goosebumps TV series, co-produced by Scholastic Entertainment with Disney, also debuted in quarter two. Based on the classic Scholastic series, which has sold over 400 million copies, Goosebumps was Disney's most-watched season premiere of the year on both Disney Plus and Hulu. Since its launch, the series has reached the top 10 spots in streaming rankings overall. According to the Hollywood Reporter, its success makes it, quote, a rare non-Marvel or Star Wars original series for Disney Plus in Nielsen's rankings. Keeping up this momentum with today's readers and viewers finding comfort in the familiar brands of childhood, Scholastic Entertainment has a broad slate of new stalgia projects in development that bring back legacy scholastic properties in fresh and innovative ways. We're partnering with top-tier platforms, producers, screenwriters, and actors, including co-producing The 39 Clues with Amblin for Netflix, developing Animorphs and Fly Guy as feature films, and working with Elizabeth Banks and Mark Platt Productions to bring the magic school bus to the big screen. All of our entertainment projects include fresh publishing programs tied to our new media moments, as well as classic and time-consumer product programs for the existing and emerging fan bases. Now moving to education solutions. Quarter 2 sales were up 1% relative to last year's record level. as this division also navigated the changing school environment while developing new channels and models to expand kids' access to books and literacy beyond schools. We also continued investing to build new flexible supplemental learning programs that respond to evolving needs in the marketplace. Sales of book collections rose through our partnerships with states and school districts, This growth continued to offset declines in sales of supplemental instruction materials that we've seen over the past few quarters as districts shift approaches to literacy instruction, often in response to state and local laws and regulations. In some cases, districts are pausing new purchases, leaving teachers using existing materials and pedagogies as they work to retrain teachers and implement new curricula. In the meantime, we continue work to realign key product lines to the science of reading while we invest in new content and products. Looking ahead, we remain positive about the mid- and long-term opportunity for Scholastic's literacy-focused education business as we move forward with our plan to build new digital and print solutions, building on our current profitable print-based education business, as I just discussed. Last week, we announced an expanded investment in our summer learning offering, which has emerged as a significant differentiated opportunity for Scholastic to grow and drive impact. School districts have acute needs to support students, educators, and families with instructional programs and books at home and outside normal school hours year-round. Scholastic acquired from LitLife Inc. rights to and control of LitCamp, foundational reading skills program for summer and extended learning, which we co-developed and have been successfully selling since 2015. We also acquired all rights and control of MathCamp, a new companion program to LitCamp, which we expect to be in the market for this summer. We're excited about this move, which solidifies Scholastic's position as a leading provider of high-impact solutions for summer learning. After nearly four months in the position, Education Solutions President Beth Olkari is moving forward with plans to reinvent our classroom magazines business as a comprehensive, blended content and data-driven instructional program. She and the Education Solutions team are also looking at opportunities to strengthen other core businesses within the division while targeting revenue opportunities. We're particularly focused on the approximately $50 billion in unspent federal ESSA funding, which must be obligated by September 2024. Turning to our international segment, revenues declined 4% in local currencies. The sales in Australia and New Zealand were impacted by continued softness in the overall retail market. But higher book fares and trade sales in the UK partly offset this. As a reminder, Ken Cleary now leads this division as President of International, building on his deep operating knowledge of Scholastic to help our international subsidiaries better leverage U.S. resources and drive growth. Of course, he also continues to serve as our CFO as we move forward with the search process, which has been productive. We look forward to providing a further update in the coming weeks. So as Ken will discuss in more detail shortly, Largely as a result of external factors, we're revising our fiscal 2024 guidance on account of lower than expected profit growth in quarter two and reduced expectations for the second half of the year. Scholastic continues to build on our unique strengths as the world's largest and most trusted children's publisher and distributor. Last quarter's solid execution reinforces our conviction in our long-term growth outlook. as well as our commitment to continue deploying capital to invest in growth and enhance shareholder returns. And now I'll ask Ken to provide greater detail on the quarter's results.