Scholastic Corporation

6,026 results. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. 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 1-1 again. I would now like to hand the conference over to your speaker today, Jeffrey Matthews, Executive Vice President and Chief Growth Officer.

Hello and welcome everyone to Scholastic's fiscal 2026 first quarter earnings call. Today on the call, I'm joined by Peter Warrick, our president and chief executive officer, and Haji Glover, our chief financial officer and executive vice president. As usual, we posted this call's 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'll 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. Scholastic had a productive summer as we prepared for the back-to-school season and advanced important initiatives. As expected, our first quarter reflected the normal seasonality of our business with an operating loss in line with previous years. We continued to make strong progress on our previously announced real estate monetization process with significant investor interest in both our Soho headquarters and our Jefferson City Distribution Center. We remain on track with the timeline we outlined in July. Haji will share further details in his remarks. At the same time, we're driving greater financial discipline and operational leverage across the company while affirming our full-year guidance. These actions position as well for profitable growth in the quarters and years ahead. In our children's book publishing and distribution segment last quarter, trade sales were solid, Strong continued demand for our global franchises drove unit sales in excess of the overall growth in the children's and young adult markets. Suzanne Collins' Sunrise on the Reaping has now sold 3.7 million copies worldwide since its March release. Looking ahead, in October, we're excited to release the 25th title, in Lauren Tarshis' I Survive series, another middle-grade bestseller, along with the illustrated edition of Catching Fire and the interactive illustrated edition of Harry Potter and the Goblet of Fire. In November, we'll publish a collector's edition of Sunrise on the Reaping to sustain momentum ahead of Lionsgate's feature film adaptation in 2026. We're also building towards another major global release with Dave Pilkey's Dogman, Big Jim Believes. Pre-orders are tracking in line with the last Dogman, positioning this newest title for a strong on sale. The Dogman franchise has more than 70 million copies in print across 48 languages. And next spring, Dave Pilkey's Captain Underpants returns in an entirely new format with the first epic manga illustrated by Motojiro. In book fairs, quarter one represents only a small portion of annual revenue given the school summer vacations, but early indicators are encouraging. Fall bookings are strong and ahead of last year's bookings. Redemption of scholastic dollars, our reward currency in book fairs, is high, indicating good engagement with book fair hosts. We're also making progress in booking more larger fairs and reducing churn. In book clubs, Quarter 1 also represents a small portion of annual revenue with year-over-year change reflecting the timing of mailings. With the integration of trade, fairs, and clubs into the new children's book group, we now have one aligned organization coordinating editorial, merchandising, marketing, and distribution to maximize the reach and value of our publishing across both our proprietary and retail channels. Our initial priority has been streamlining operations and infrastructure, enhancing data analytics, optimizing inventory and overhead, and driving early cost savings while building a foundation for long-term profitable growth. Turning to Scholastic Entertainment, We're positioned for renewed growth as industry greenlighting accelerates and our 360-degree IP strategy gains traction. Now with the capabilities and assets of Nine Story Media Group fully integrated into our strategy and organization. We're using YouTube as a launchpad for new properties after integrating all Nine Story branded channels under the Scholastic banner. Clifford remains a cornerstone franchise, both in traditional linear and on digital platforms. We expect to surpass 10 million monthly views by calendar year end of classic Clifford content on YouTube. And we're supporting this with new publishing, consumer products, and promotional partnerships to lay the groundwork for Clifford's next phase of growth. The trailer for Paris Hilton's Paris and Pops dropped on all social media platforms and has been viewed more than 1.8 million times. The series YouTube launch is coming September 23rd, with episodes releasing weekly and toys launching in fall 2026 with Playmates Toys, as they announced this morning. Scholastic holds global publishing rights, with tie-in books also scheduled for fall 2026. This approach, pairing digital-first content with publishing, is central to our strategy. It not only expands the reach of our IP, but also builds brand affinity that flows back into book sales. As just announced, we've also launched the first-ever Scholastic branded streaming app in partnership with Future Today. The app offers families a free, safe, and trusted destination to enjoy beloved Scholastic programming on demand with nearly 400 half hours of content and will scale to more than 1,300 half hours by fiscal 2027. A significant marketing campaign begins this month to build awareness and adoption. Together, these initiatives are expanding the reach of Scholastic's IP, creating high-margin digital revenue streams and strengthening our position at the intersection of publishing and media. In scholastic education, sales are pressured in the quarter by a volatile funding environment, reflecting the delay of some federal education grants and cancellation of others. Further, several states are facing budget impasses. In this challenging environment, we continue taking steps to strengthen this business for the long term, Under new leadership, the team is refocusing our go-to-market functions on our core strengths, rationalizing the product portfolio and prioritizing investment in high-impact offerings like Knowledge Library. While near-term results remain constrained by the market, education continues to be central to Scholastic's mission. We remain confident in its long-term potential. International results reflected continued portfolio rationalization and the focus on margin improvement. We see growth opportunities in expanding English as a second language programs and in growing markets like India and the Philippines. Overall, Scholastic delivered a solid start to fiscal 2026. We advanced our strategy, including recent reorganizations, invested in some of our strongest franchises and IP, made progress on our potential real estate monetization, and prepared for the important back-to-school season. With these actions, we're affirming our full-year guidance and remain confident in our ability to deliver meaningful profit growth while continuing to create long-term value for our shareholders and lasting impact for children worldwide. Thank you, and I'll now turn it over to Haji.

Thank you, Peter, and good afternoon, everyone. As usual, I will refer to our adjusted results for the first quarter, excluding one-time items unless otherwise indicated. please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter discussed earlier, our first quarter reflected the normal seasonality of our business during the quiet summer months. I'm proud of our team's hard work preparing for the back-to-school season, and we are well positioned to achieve our plan this fiscal year and beyond. Beginning with our consolidated financial results, In our typically small summer first quarter, when our school reading events division had minimum sales, revenues decreased 5% to $225.6 million. Our seasonally adjusted operating loss improved to $81.9 million from $85.6 million in the prior year period, reflecting cost-saving initiatives. Adjusted EBITDA was a loss of $55.7 million, an improvement from a loss of $60.5 million a year ago. Net loss was $63.3 million compared to $60.3 million in the prior year period. On a per diluted share basis, adjusted loss increased to $2.52 compared to a loss of $2.13 last year, primarily reflecting lower shares outstanding due to share buybacks. As a reminder, Scholastic results are highly seasonal. In addition to first quarter, we also generally recorded operating loss in our third quarter with profitable second and fourth quarters. Turning to our segment results, in children's book publishing and distribution, revenues for the first quarter increased 4% to $109.4 million, reflecting growth in school book fares. Segment-adjusted operating loss improved to $34.3 million from $36.6 million in the prior year period. Book fair revenue were $34.1 million in the quarter, an increase of 18%, driven by higher scholastic dollar redemptions. Book clubs revenue were $1.8 million in the quarter, compared to $2.7 million a year ago, reflecting the timing of mailings as Peter discussed. In our trade publishing division, revenues were $73.5 million in the first quarter, essentially flat with prior year period, reflecting continued strong demand for Hunger Games and Harry Potter titles. We are optimistic in our publishing plan for this fiscal year, which features many exciting new titles in upcoming quarters. Turning to Scholastic Education, segment revenues were $40.1 million in the first quarter versus $55.7 million in the prior year period, reflecting lower spending on supplemental curriculum products and the timing of state-sponsored program revenues. Segment-adjusted operating loss was $21.2 million in the first quarter compared to a loss of $17 million in the prior year period, reflecting lower gross profit partly offset by cost cuts and careful expense control. Turning to our entertainment segment, revenues decreased by $3 million to $13.6 million compared to $16.6 million in the prior year, primarily driven by fewer episodic deliveries as anticipated. Segment adjusted operating loss was $4 million, a decline of $5.2 million from the prior year quarter. The current year period includes $700,000 in incremental amortization expense on intangible assets related to the timing of the acquisition in the prior year period. As Peter discussed, we remain encouraged by recent momentum and our position for renewed growth as industry green lighting accelerates. International segment revenues were $59.4 million in the first quarter, up from $56.8 million a year ago. Excluding the $0.2 million year-over-year impact of favorable foreign currency exchange, segment revenues were up $2.4 million, primarily driven by higher revenues in Australia, the UK, and Asia. Segment-adjusted operating results improved to a loss of $4.1 million compared to a loss of $8.3 million in the prior year period, reflecting higher revenues and continued optimization of this business. Unallocated overhead costs decreased by $6.6 million to $18.3 million in the first quarter, primarily driven by lower employee expenses from cost reduction initiatives. Now turning to cash flow in the balance sheet. In the quarter, seasonal net cash used by operating activities was $81.8 million, compared to net cash used of $41.9 million in the prior year period. This increase in cash use was primarily driven by fluctuations in networking capital with higher inventory purchases including tariff charges, the timing of general operating expense payments, higher interest, partially offset by higher customer remittance. Severance payments were also higher as part of the cost-saving initiatives. Free cash use in the first quarter was $100.2 million compared to $68.7 million in the prior year period, reflecting lower cash flow from operations partially offset by lower capital expenditures. At quarter end, the company had borrowings of $325 million under its unsecured revolving credit facility. Net debt was $242.8 million compared to net debt of $136.6 million at the end of fiscal 2025. which was due to the working capital requirements. In the first quarter, we continued to return excess cash to shareholders through our regular dividends of $5.2 million. We currently have $70 million remaining on our share buyback authorization. The company expects to continue purchasing shares time to time as conditions allow. on the open market or in negotiated private transactions for the foreseeable future. As we previously announced, the company retained Newmark Group to identify investment partners for potential sell-leaseback transactions of all or part of its owned office in retail real estate in New York City and its Jefferson City distribution centers. These processes have generated significant interest and are progressing. We expect both to conclude this fall. While there can be no guarantees of transactions of either or both properties, we remain optimistic about both in the context of our capital allocation priorities, which include debt reduction and share repurchases. Now for our outlook for the remainder of the year. Our strategic efforts to align spending with long-term goals are driving favorable operating margins, supported by our ongoing SG&A optimization. Our goal for these actions is to sustainably lower our cost structure, especially with respect to non-revenue generating and consulting expenses. As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expenses this fiscal year in our cost of product. We expect a strong second quarter benefiting from major trade releases. As Peter previously indicated, we are affirming our fiscal year 2026 guidance for revenue growth of 2% to 4%, adjusted EBITDA of $160 to $170 million, and full-year free cash flow between $30 and $40 million. Thank you for your time today. I'll hand the call back to Peter for his final remarks.

Thank you, Hachi. In conclusion, after a solid start to the fiscal year and the return of students to schools, Scholastic is positioned well to continue its momentum and execute its plan for substantial earnings growth in fiscal 2026. As I laid out in July, our plan is focused on building Scholastic's long-term opportunity as a global leader in the children's publishing, media, and education spaces, meeting kids, families, and schools' essential needs to educate, inform, and engage kids. In support of that, we continue to reduce costs, strengthen our organization, return capital to shareholders, and take steps to optimize our capital structure and balance sheet. We look forward to providing our next update in December after a big second quarter. Thank you all very much. Let me now turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator?

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 1 1 again.

One moment for questions. Our first question comes from Brendan McCarthy with Sidoti. You may proceed. Great. Good afternoon, everybody. Appreciate you taking my questions here.

I just wanted to start off looking at the education solutions business. I know we just wrapped up the summer months, but I'm curious if you've had any early feedback on some of the new products that you brought to the market and maybe how they have been resonating with schools or students.

Hi, Brendan. This is Jeff here. I'll step in as the interim head of this business. Look, we're getting great feedback from customers around some of the new products. Of course, it's a difficult selling situation. As Peter described, there are some delays and cancellations of some federal funds. So I think in that environment, we're very encouraged by what we're hearing, particularly with Knowledge Library. and as well as our core products, our classroom libraries and our classroom magazines.

Got it. I appreciate the color, Jeff. And I guess at this point, what do you think, so I understand there's been the pause in spending from states and school districts. What do you think are key variables to keep an eye on that would ultimately turn this trend around?

Good question. It's important to understand that schools continue to spend money. It's an environment when the certainty of future funds is low, they're more likely to hold back on anything but the most necessary and must-have purchases. What we're doing, our strategy is very much focused on helping our customers understand why Scholastic's products align with their most critical needs. Of course, as there's greater funding certainty, and we've seen that some of the federal programs that had been paused or federal grants that had been paused were released in late October. as there becomes more certainty, we expect that school district and school and district leaders will be more forthcoming and more confident in their ability to purchase, because there's no question schools continue to need materials in the classroom. In many cases, they've made significant investments in their core curricula. or the last year or two, this is a time when they start to need to fill out their classrooms with additional materials to support their teachers and support their students. So with that respect, the cycle is favorable. It's just getting through this moment of uncertainty that has been caused by volatility, largely in Washington.

That makes sense. Thanks, Jeff. Certainly something to keep an eye on there. I wanted to turn to the entertainment segment I know your priority has really been focused on getting some content up onto YouTube where there's the advertising revenue share model. I guess what's the – when can we expect to really see that kind of flow through into the financial statements, you know, into the P&L? And I guess more of a long-term perspective too, what does long-term success really look like with the nine-story media business?

It's Peter here, Brendan. Look, the digital model that we now have and the digital income that we're getting is high margin, and it's going to grow. So that's a really good thing for us. We will see the major benefits. you know, going progressively out into the future. There's not going to be some sort of like, you know, sudden change this quarter or next quarter, if you know what I mean. But there's a lot of what's going on is the benefits of what we're doing with things like YouTube and so on is that it's not just a source of high-value revenue. It's also exposing our brand. And it's driving kids to buy books about Clifford or whatever as well. I mean, we now have 1.2 million subscribers to Scholastic channels on YouTube. We didn't have those before. And so this is a major thing. And, you know, we are... pretty confident that over time this is going to be a major source of high margin revenue because it's the revenue share from the advertising that comes with it. And it's also part of this 360-degree strategy that we've talked to you and others about. What we're really doing is integrating as closely as possible both the publishing and media strategy and seeing the interrelationships between the two and gaining benefits from both our media and our book properties.

Right, that makes sense. Thanks for that detail, Peter. I guess just in terms of scale, are you able to maybe quantify what the revenue opportunity might look like as it relates to 9Story? And I guess strictly speaking from the perspective of monetizing the digital content side? Hey, how you doing? This is Haji.

Just taking that question from you. So right now we're really in early stages of this, and we're going to try to really see. Right now we're only on two platforms with the opportunity to increase that to another six or seven platforms. And I think when we look at it, this has been both an opportunity for us to get our content in front of new viewership and really build on the success of what we already have. But being able to actually quantify this impact is probably going to take us a few months as we see the viewership grow. And once again, we're dealing with a partner in this and sharing the share of that revenue. And most likely we'll see this opportunity or upside in 2027.

Understood. Thanks, Haji. One question for me on the cost structure side, looking at SG&A. Just curious as to where you're taking costs out of the business and maybe where you see additional room for expense reduction there.

Well, I can say this, that we really dove deep into the restructuring of the organization in this fiscal year, early part of this fiscal year. And we continue to define areas where there's opportunities for us to reduce spend. We will do. But we definitely took a really good look at it prior to actually giving our guidance. And our guidance reflects a majority of our spend reductions. I think we announced somewhere between $15 and $20 million of cost reductions. And we're right now seeing the fruition of that come through in our financials.

Got it, got it. Thanks, Haji. And one more question for me, just on the guidance affirmation. I guess at this point, I know we're only at the start of the school year, but at this point, what variables might cause material underperformance or outperformance of the full year fiscal guide?

For us, it's all about understanding where the retail market is. As you know, we're experiencing a lot of things in the marketplace. Consumer and school spending is somewhat in question, but we feel very confident in the plan we put out from an organization perspective. I don't foresee any major concerns from my side of what's going on, but there could potentially be some upside and downsides, and we're going to manage it as an organization, and that's why we We leave the opportunity to be very conservative in how we approach things, but at the end of the day, we want to continue to invest in growth, which is in our revenue side of the business, and fall back on things that do not generate revenue. And the most important thing for us is the concerns of tariffs, as it reflects our business, because we are a retail business. And those expenses, which we've already planned for, which is about $10 million this year, we're continuing to monitor all the things that are going on with the government down in D.C.

I think it's, Brendan, the other thing is that, as I mentioned earlier, School book fairs, the number of fairs that we have are up, and it's too early to tell. But clearly a key thing that matters to us is things like revenues per fair, the average revenues per fair. We haven't had enough fairs yet to be able to tell. you know, to be able to calculate that yet. But I think we're, you know, we'll see about that. No reason to think that we're not on track with what our planning is. And, you know, it's good having a number affairs book being up. So that's also a good thing.

That makes sense. I appreciate the call there, Peter and Haji and Jeff. Thank you, everybody. That's all for me.

Okay.

Thank you. Our next question comes from Drew Crum with B. Reilly Securities. You may proceed.

Hey, guys. Good afternoon. I want to go back to the education solutions business. You flagged funding uncertainty as an impact on spending for supplemental materials. I think in the recent past, you've also indicated you expect market conditions to get better over the next 12 to 24 months. How do we reconcile those two? Should we anticipate a similar trajectory for the business as we observed in 1Q as you move through fiscal 26? Or do you think things stabilize as an opportunity to improve profitability as you move through the year?

Hi, Drew. This is Jeff. Again, we are expecting, based on the current patterns, that this year will be more back-end loaded than previously. It's been inside baseball, but we have shifted our selling year to be aligned with our fiscal year. That's going to give us – which will mean we'll go into Q4 with a very full pipeline. We didn't start Q1. This summer, we started with an empty pipeline. We also expect that as we – you've seen this, as I'm sure you were doing, monitoring the headlines around federal education policy in states. that some of these delays over the summer and in the spring, which of course there's a long lead time with part purchases given selling cycles, those were particularly hard hitting over the summer. We expect, we're hopeful that those headwinds will moderate over the fall and into the spring. and we're doing everything we can to be very well positioned. Of course, leaning into the market now, sopping up money that's available, and then making sure we're ready for a very big spring selling season.

Okay. And also on top of that, Drew, just to be clear that we are very diligent about our frugality and what we spend and how we continue to look at our expenses within that business. So I just wanted to make sure you were clear on that.

Okay. All right. Helpful. Maybe looking at fiscal 2Q, Peter, I think you characterized your expectations for the quarter or that it will be big. I'm curious if you can expound upon that and kind of what the puts and takes are for the quarter.

Well, I think... I mean, first of all, just looking through the segments, really, if you look at trade publishing, we've got a big quarter, too. And we've got some really good stuff coming, including a new Dogman. And, you know, all the indications that we're seeing with, you know, advanced sales in and all the rest of it are giving us good news. you know, giving us good feelings that that's going to be, you know, significantly higher than, you know, we had in quarter two last year. And, you know, we're feeling pretty good about the year as a whole as well. The other areas Such as book fairs. I mean, as we mentioned before, the fair count in quarter two in our quarter two will be higher than the fair count in the prior year. And that's, you know, the bookings are up. and everything's looking pretty good at the moment but it didn't I can't give you any more information than that because we we really need to have more fares actually done sorted out and and all the rest of it but what I can tell you is that I think the folks doing it psychologically are feeling pretty good so that's you know I'll I'll take I'll take that the other thing that we're seeing for you know in terms of puts takes is actually our cost base I mean, you'd see even in education that there was a significant reduction in year-over-year revenues, but the difference in revenues was pulled very significantly down when you actually look at the OI. Sales were down $15 million, but OI was only down by $4 million. And that's because of the cost savings that we've been making. The other benefit that we've had just on the cost side, you know, is our operating expenses generally and things that we've been doing. And those will – a lot of that was created in – in quarter one, but a lot of it is also flow through from the benefits that we had in costs in the second half of the prior financial year. They're flowing through now. I'm feeling good about all of those things. I think the other thing that we've seen is we've had a good pickup in one or two international markets as well, particularly UK and Australia, New Zealand. I mean, Australia, you know, the whole education year and school book fairs, book fairs is the other way around, as you want to hear. So they're busy and active at the moment. And we had a good quarter two from – quarter one, sorry, from them – The other thing we've seen is that our book business, particularly in the UK, has been doing very well, especially with some of these key titles like Sunrise on the Reaping, Suzanne Collins' Hunger Games series, Dogman, et cetera, et cetera. So those are great. They're all making me feel pretty good about quarter two at the moment, and they give me a strong sense that the guidance that we've given for the year is we're absolutely on track for that. And, you know, in terms of our internal expectations, you know, we were happy with what we were doing in, you know, in quarter one. They were, you know, that from an internal, the way we've been targeting and we've been expecting that was, you know, that's good.

Great. Thanks, Peter. And then maybe one last one for me for Haji. You outlined the drivers behind the negative variance for cash flow and free cash flow specifically in your preamble versus the year-ago period. Sounds like you believe you can make that up over the balance of the fiscal year. What are the swing factors to achieving that?

So the majority of it is actually around our revenue and how we forecast our revenue for the year. So receipts are going to come in a little bit stronger first half, excuse me, second half versus first half. That's number one. Number two is that we're really tightly watching and actually our forecast for spending on capital expense is a different profile than last year. We made significant investments last year on our one scholastic fulfillment center and Those are actually coming down year on year, so that's number one. And then number two, just the things that we're looking at to invest in from a growth perspective is slightly different profile this year than last year. So I'm extremely excited about where we are. And then the last thing I want to say is we both had Dave Pilkey and Suzanne Collins to pay last year, whereas this year we only have to pay just Dave Pilkey in terms of the new titles that are being released. So that's another thing. So I'm very excited and confident about where we are from a capital perspective and where we're spending our money this year.

Okay. All right. Appreciate it, guys. Thanks.

All right. Thank you, Drew. Thank you. And this concludes our Q&A. I will pass the call back to management for any closing remarks.

Well, thank you very much. And also thank you to our authors and illustrators, educators, employees. You know, it's their hard work and creativity that drives our success. And I'd also like to thank our shareholders and all who joined us this afternoon live or on the recorded call later. We appreciate very much your support. Bye.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.