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spk01: 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.
spk02: 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.
spk00: 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.
spk04: Thank you, Peter, and good afternoon, everyone. Note that we recorded no one-time items in fiscal 2023 or in the second quarter of fiscal 2024. Please refer to our press release tables and SEC filings for complete discussion of one-time items. As Peter discussed earlier, our second quarter profits improved year over year, and we remain confident in our long-term growth outlook and shareholder value creation strategy. Results came in below expectations, however, largely due to external factors. Turn to our consolidated financial results. Second quarter revenues decreased 4% to $562.6 million. Operating income in the quarter was $101.3 million, up from $100.1 million in the prior year period. Net income was $76.9 million compared to $75.3 million in the prior year period, and adjusted EBITDA increased to $124 million from $122 million a year ago. Earnings per diluted share was $2.45 compared to $2.12 last year as our share buyback efforts over the previous four quarters have driven down our outstanding share count. Now turn to our segment results. In children's book publishing and distribution, revenues for the second quarter decreased 6% to $392.8 million, primarily driven by lower participation in orders and book clubs as the business is repositioned to a smaller, more profitable core, as well as lower timing-related production revenue from Scholastic Entertainment. Operating margins improved and operating income decreased by only 2% from the prior year period to $110.8 million. Lower spending in clubs on promotions and operations and improved gross margins in consolidated trade partially offset the impact of lower sales. Book fairs revenues increased 1% to $242.1 million in the quarter, driven by higher fair count and increased redemptions of incentive program credits partially offset by lower revenue per fair. As Peter noted, we benefited from modestly higher revenue per fair on the same fair basis. Fair count remains on track to reach nearly 90% of pre-pandemic levels this year, up from 85% in fiscal 2023. Book Club's revenues of $32.4 million were down versus the prior year period revenues of $57.6 million. As part of the transition of this channel to a smaller, more profitable core, we eliminated unprofitable offerings during the back-to-school season. Consolidated trade revenues were $118.3 million in the second quarter compared to prior period revenues of $119.9 million. The segment revenue decrease was driven by lower revenues in Scholastic Entertainment relative to the prior year when the company completed the delivery of episodes of the animated series, Eve of the Owlet, based on Scholastic's Owl Diary series. Excluding the year-over-year impact of these media revenues, trade increased 3%, driven by multiple front-list best-sellers in the quarter, despite continued softness in the retail book-selling market. Education solutions segment revenues were up 1% to $81 million in the second quarter, driven by higher revenues in state and district partnerships, partially offset by sales declines in supplemental instructional materials related to the shift in prevailing approaches to literacy instruction. Segment profit decreased $1.2 million to $5.8 million compared to the prior period, largely reflecting lower gross margins due to product mix. Growth in low margin customized book collections driven by districts seeking to comply with state and local content mandates contributed to this shift. International segment revenues of $86.5 million in the second quarter trailed the prior year period revenues of $89.6 million. Excluding the $700,000 year-over-year impact of favorable foreign currency exchange, international revenues were down $3.8 million, reflecting lower revenues in Australia and New Zealand, and softness in retail book selling continued to impact trade sales in these countries. Segment operating income increased $1.3 million to $8 million, primarily driven by improved results in Canada, which benefited from the reorganization of book clubs in the first quarter. Unallocated overhead costs of $23.3 million decreased from $26.8 million in the prior period, benefiting from higher rental income associated with an additional tenant in the retail space of the company's own headquarter building in New York City. We continue to market floors two through four of our headquarter building for outside tenants. We recognize rental revenue of $2.3 million in the second quarter. As a reminder, this was previously recorded as a benefit in SG&A in the prior year period. On the 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 provided by operating activities was $109.7 million in the current quarter compared to $81.6 million in the prior period. Lower inventory spend in the quarter, driven by a lower freight and manufacturing cost compared to a year ago, benefited working capital. As we noted last quarter, we continue to manage inventory purchases substantially closer to our demand, resulting in sufficient inventory on hand and lower spend. We also continue to 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 this fiscal year. Free cash flow in the second quarter was $88.6 million compared to $62.7 million in the prior year period, reflecting this tighter inventory management. At the end of the second quarter, at the end of the quarter, cash and cash equivalents Net of total debt was $143.2 million compared to $218.5 million at the end of fiscal 2023. In addition to investments in content and capabilities to drive growth, we continue to return capital to shareholders in the second quarter for our regular dividend and open market share repurchases. We repurchased almost 1.4 million shares last quarter for $52.3 million. Together with our regular dividends, we returned over $58 million in the second quarter and $101 million this fiscal year. In the fiscal year 2024 thus far, we have repurchased 2.2 million shares, which net of 391,000 shares issued related to stock compensation represent 6% of the company's shares outstanding. Company shares outstanding are now below $30 million. Today, we announced our board of directors has authorized an additional $66.2 million for repurchases, topping up our current share buyback authorization to $100 million. Elastic remains consistent in our capital allocation priorities, and we are committed to pursuing 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. Turning to our outlook. Based on our second quarter results and our current forecast for the second half of the year, we have updated our fiscal 2024 guidance. We now expect adjusted EBITDA of $165 to $175 million. This excludes the impact of one-time charges related to restructuring and cost saving activities of $7 million to $10 million, of which we have incurred $6.3 million so far this year. Full-year revenue is expected to be approximately level with or slightly below the prior year. As a reminder, Scholastic typically generates the greatest contribution in the seasonally important second and fourth quarters. We continue to expect solid fourth quarter performance following a seasonally smaller third quarter. We now forecast fiscal 2024 CapEx and pre-publication spending of $100 million to $110 million, compared to $88.9 million in fiscal 2023, and full-year free cash flow of between $35 million and $45 million. As Peter discussed earlier, in response to this revised outlook, we have taken steps to target additional revenue opportunities and align spending in the second half of the year. Though we have reduced our outlook for the year, largely based on external factors that Peter described, our business remains fundamentally strong and remains focused on our long-term growth and our capital allocation priorities, including return capital to shareholders. Thank you for your time today, and have a happy holiday season. I'll now hand the call back to Peter for his final remarks.
spk00: Thank you, Ken. As you and I have discussed this afternoon, Scholastic performed solidly in the second quarter, despite a macro environment. slowed profit growth below our expectations and has caused us to adjust our guidance. I'm confident Scholastic's unique scale and ability to create high quality books and content and get it to millions of kids in the US and globally has so much potential for growth and impact today. I want to take a moment to thank Scholastic's world-class employees. They've worked tremendously hard this fall to serve our customers, engage our partners, and protect Scholastic's long-term mission and opportunity. And I'd also want to thank our shareholders for their continued support. So let me now turn the call over to Jeff.
spk02: Thank you, Peter. We appreciate your time today and continuing support. With that, I'll turn the call over to the operator.
spk01: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk03: One moment for questions.
spk01: And our first question comes from the line of Brendan McCarthy with Sudoti. You may proceed.
spk05: Hey, good afternoon, Ken and Peter. Thanks for taking my questions today.
spk04: Hey, Brendan. Pleasure.
spk05: Hey. we could start off taking a look at the book clubs business, I guess how, from a revenue perspective or just in general, how, how small do you expect the business to, to get eventually?
spk00: Well, I don't, I don't think we've got an exact, um, an exact, uh, number in mind. Um, and actually what we, what we've always planned for is that there would be a reduction in the revenues in book clubs, but that would form a much more, um, stable basis in order to go forward and to increase the profitability so essentially what we've been doing is a sort of shrink to grow strategy and you know the the revenues have been a little bit below perhaps what we might have expected because of the general environment within schools but I don't think it's in any way undermined the strategy that we're that we're pursuing for a longer term and profitable and stable book club's business.
spk05: Got it. Understood. And then looking at the education solution segment, you mentioned there's been a shift in spending, supplemental instruction spending at the school and district level. Can you go into detail about what exactly this change looks like, and then also, you know, maybe what Scholastic is doing to adapt?
spk00: Well, there's been, what's happening within schools and literacy is sort of a movement away from what was termed as a guided reading approach to literacy towards a more phonics-based approach, which is called the science of reading. That's a trend that has accelerated over the last two or three years. And what we're doing is clearly adapting our own supplemental materials so that they are much more in tune with the sciences of reading. What's important to say is that independent reading is still incredibly important in the literacy journey and that Scholastic is better positioned there than any other literacy provider.
spk05: Got it. That's helpful. Now, Peter, I know you mentioned the ESSR funding initiative due to sunset, I believe, in 2025. I guess, did you see any benefit from that spending in the second quarter, second fiscal quarter?
spk00: Well, it's due to what's got to happen is that the funding has to be obligated. In other words, it doesn't necessarily have to be immediately spent, but it has to be committed by no later than September 2024. So we would expect that with a lot of hard effort on our part, that there are still good opportunities for us, both in terms the second part of this financial year, but also in the following financial year as well. Also, we're encouraging all that we can to make sure that those federal ESSA funds can be used in areas where we have really tremendous products. So, particularly in areas like summer reading, for example, so that we can really make sure that schools have got the funding that they need for what is an increasing priority in how they do things, which is why the summer book collections, et cetera, have become so important to us. And we can see that the remaining ESSA funding is one of the sources whereby we will be able to do and continue to get very strong representation in the purchasing at that time.
spk05: Got it. And then one last question for me, just with regards to the retail book market. I know you mentioned strong results from the front list titles. I'm just curious as to maybe your outlook on the back list titles and when that market might return to growth.
spk00: I don't have a complete roadmap on that. But I think one of the things that we have been seeing is some pick up. in trade sales, Main Street sales, as it were, during the last few weeks. And we're particularly benefiting from that because of the titles that we've got that have done so well, the Cat Kid and other titles. I think what's important about backlists is that the most successful publishers all have really strong backlists. And it's particularly important for us because we can monetize those backlists, not just through sales of books on bookshelves, but through our media activities, we're able to, as I mentioned in the report, that we can see other purposes for that intellectual property. And that is going to be an increasingly important part of what we do. And furthermore, as there's been sort of changes in the sort of screen-based market at the moment, whereby fewer but much more higher value properties are being transformed into media, into streaming, and particularly into feature films. then the high quality of our backlist and our titles and our characters are really important. And as we've discovered in recent discussions with houses in LA and elsewhere, is the tremendous value that screen-based companies see in our backlist. And so having that backlist, I think what we're going to find is an increasing part of the value of that is going to be coming through screen-based opportunities rather than just paper-based opportunities. But it is, as I mentioned in the talk, it's a virtual circle going from print to screen to merchandising to, you know, back to the books.
spk03: Got it. Thank you. That's all for me. Thank you.
spk01: Thank you. Thank you. And this concludes our Q&A. I will pass the call back to management for any closing remarks.
spk00: Thank you very much, Josh. And thank you to all of you who joined us this afternoon. And of course, I wish everyone a very happy holiday season. We look forward to engaging with our investors in coming days and to providing a further update on our progress in March on our quarter three call. Thank you.
spk01: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.
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