Scholastic Corporation

Good day and thank you for standing by. Welcome to the Scholastic Report's third quarter fiscal year 2026 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, Chief Growth Officer and President, Scholastic Education.

Hello and welcome everyone to Scholastic's Fiscal 2026 Third Quarter Earnings Call. Today on the call, I am joined by Peter Warrick, our President and Chief Executive Officer, and Haji Glover, our Chief Financial Officer and Executive Vice President. As usual, we have posted the accompanying 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 accompanying 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 Warrick to begin this afternoon's presentation.

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. In the third quarter, Scholastic advanced our strategy to support long-term growth and enhance shareholder value. A key milestone was the successful completion of our sale leaseback transactions involving our New York City headquarters, and Jefferson City Distribution Facility. Last December, this unlocked more than $400 million in net proceeds and represented an important step in optimizing Scholastic's balance sheet. Consistent with our disciplined approach to capital allocation and our belief that the company's shares represent a highly accretive investment, we moved quickly to return cash to shareholders under an upsized $150 million share repurchase authorization which we have nearly exhausted. We've already bought back more than 4.4 million shares for approximately $147 million in the open market, or $33.30 per share on average. With a view toward further optimizing our balance sheet and enhancing shareholder value, today we're announcing long-term net leverage targets for the company, as Haji will discuss. As a next step, the Board has authorized a $300 million share repurchase authorization comprising of a $200 million modified Dutch auction tender offer with the remaining $100 million to be used for repurchases in the open market. The offer price range has been set to $36 to $40 per share. Assuming it's fully subscribed, the tender offer would represent approximately 25% of Scholastic's shares outstanding as of quarter end. This is yet another step in the capital allocation strategy we've been executing since fiscal 2022, already returning over $650 million to shareholders through share repurchases and dividends, while continuing to invest in initiatives that support long-term growth. Haji will provide additional details later in the call. Turning to our operating performance, third quarter results were in line with expectations as we continued executing on initiatives supporting long-term growth and margin expansion. As a reminder, this is typically one of our smaller quarters for revenue and profitability given the seasonality of our business. Based on our performance to date, and outlook for the remainder of the year, we're reaffirming our fiscal 2026 adjusted EBITDA and free cash flow guidance. We expect full year revenue to be approximately flat compared to the prior year, reflecting year-to-date softness in education and very strong comps in trade a year ago. Let me now turn to our segment performance, beginning with children's book publishing and distribution. Last quarter, Children's Book Group combined powerful publishing and beloved franchises with unique school-based distribution channels. Through book fairs, trade publishing, and our proprietary school network all working together, we reach children and families and connect them with stories in ways no other company can replicate. Book fairs once again demonstrated the strength of Scholastic's unique school-based channels. Fair counts continue to grow year to date, and we're benefiting from higher revenue per fare, strategic merchandising and pricing initiatives, lower cancellations, and greater adoption of e-wallet. That's a digital payment account that allows families to preload funds for students to spend at the fair, increasing participation and simplifying transactions. We've also experienced strong redemption of scholastic dollars, the reward currency schools receive for hosting book fairs. A key innovation this year is the launch of Discovery Fairs, the first new format we've introduced in more than a decade. These fairs feature curated collections that focus on science, technology, engineering, arts and math, alongside hands-on science and art kits designed to bring discovery-based reading and learning into the fair experience. Early pilots have already shown robust demand. Building on the partnership we announced last quarter with YouTube sensation Mark Rober, which reaches more than 70 million subscribers, we're beginning to bring his highly popular science and engineering brand, Crunch Labs, to students through Scholastic's publishing and school channels, including new books, activity guides, and Klutz-branded products. As we look ahead, book fairs remain one of Scholastic's most powerful channels to reach children and families and represent a meaningful long-term growth opportunity for the company. In book clubs, our other school-based channel, results continue to reflect evolving classroom and teacher engagement patterns. The program is expected to reach nearly 300,000 teacher sponsors nationwide this year, providing Scholastic with a direct connection to classrooms across the country. We saw sequential improvement from the fall as recent program improvements, including updated flyers, improved digital ordering and targeted promotions, strengthened teacher engagement and participation. In trade publishing, Scholastic's publishing portfolio and global franchises continued to resonate strongly with kids around the world. Third quarter results were solid, though down relative to the prior year, reflecting shifts in the publishing calendar compared to a year ago, along with the impact of adverse winter weather and other short-term factors on the retail book market. Following the successful launch of Dave Pilkey's Dogman, Big Jim Believes, in quarter two, momentum across Pilkey's publishing universe remains strong. The latest title in the series, held the number one children's title for seven consecutive weeks and was the number one overall title across the industry in both November and December, while backlist titles also continued to perform strongly on bestseller lists. Looking ahead at quarter four, Pilker's universe expands into the fast-growing category of children's manga, with Captain Underpants, the first epic manga, publishing in April. The Hunger Games franchise, continued to generate strong global demand with the latest title in the series, Sunrise on the Reaping. This book has now sold approximately 5.4 million copies and remained on bestseller lists since its release last March, including 50 consecutive weeks on the Young Adult bestseller list and currently ranking number three nearly a year after its initial release. More recent special editions, as well as the award-winning audiobook, have helped sustain momentum across the series. We expect continued Hunger Games momentum from paperback and movie tie-in editions ahead of the Lionsgate film adaptation of Sunrise on the Reaping this fall. Our Wings of Fire series also continue to engage readers globally with the recent release of the graphic novel edition of Talons of Power, which debuted at number one overall in December and currently holds the number three position on the New York Times graphic books and manga bestseller list. Furthermore, in the first week of the new quarter, we published Wings of Fire number 16, The Hybrid Prince, the highly anticipated new installment in the series and the first in several years. The book debuted as the number one title overall across both children's and adults categories. already captivating avid fans and new readers of this thrilling dragon series around the world. Turning now to Scholastic Entertainment. In the third quarter, this division continued expanding the reach of our IP across digital platforms and new audiences. We advanced our pipeline of media development and production as we begin work on major new projects expected to be announced in the coming months. Green light activity also is improving, and with it, the strength of our development slate, supported by our in-house production and animation capabilities. We grew viewership and reach across our digital platforms, particularly YouTube and Scholastic TV, as families continue discovering Scholastic stories and characters in new ways. Our Scholastic branded YouTube channels generated more than 85 million views in the quarter, up over 200% year over year, with audiences spending over 21 million hours watching our content. On YouTube last quarter, we expanded our network of Scholastic branded channels with two new curated hubs, Scholastic Steam and Scholastic International, surfacing our content to a larger global audience. At the same time, our Scholastic-branded set-top TV app continued to scale as a trusted destination for families seeking high-quality children's programming in an increasingly crowded digital media landscape. The platform now offers more than 800 episodes across Scholastic properties and is available across major streaming ecosystems including Roku, Apple TV, Fire TV, and Android platforms. Since launching this fall, the app has already generated nearly 100 million minutes watched and more than 5 million views, with engagement averaging about 30,000 views per day. Growing audiences across our digital platforms create new opportunities to extend our stories and characters across books, digital platforms, television, and consumer products. One example of this is our Clifford the Big Red Dog franchise, where increased engagement across digital platforms and media is helping introduce the character to a new generation of kids and reinforcing demand for the books. Book sales across all Clifford titles have grown meaningfully this financial year compared to the prior year. Turning now to Scholastic Education, where we're making meaningful progress executing our strategy to transform the business for growth. Revenues were down 2%, representing a significant deceleration of the declines we saw in the first and second quarters of the year. Importantly, profitability improved year over year. In January, we appointed Jeff Matthews as the permanent president of the division after stepping in to lead this division on an interim basis last June. Jeff also continues in his role as chief growth officer. Under his leadership over the last nine months, The team has refined the go-to-market strategy and streamlined the product portfolio to align more closely with district and school needs. We've also taken significant steps to sharpen our focus on the areas where Scholastic is best positioned to help children achieve their full potential through literacy, partnering with districts, schools, teachers, families and communities, while improving the cost structure and operating discipline of the segment. District and school spending on supplemental curricula and resources, including our instructional programs, classroom libraries, literacy resources, and professional services, remains tight, given continued funding uncertainty and the ongoing transition of the US education system to science-based approaches to literacy instruction. As seen in last quarter's results, more effective and efficient go-to-market execution and stronger product alignment with the science of reading are having a positive impact. We continue to close the gap with the prior year as we stabilize this portion of the business and position ourselves for growth in a recovering market. It's important to remember, however, that as a product category, supplemental curricula and resources represented only approximately 25% of Scholastic Education's revenues last year. Unlike most educational publishers that primarily compete in the instructional space, Scholastic education also has significant business lines dedicated to serving teachers, families, and community partners, building on the power of our trusted brand. Our solutions give children access to engaging books and magazines and enable their development as readers, while empowering teachers and families through evidence-based tools and support. Funding here is significantly more diverse than for instructional sales, spanning district and school budgets state and philanthropic grants, and teacher and parent purchases. It's not surprising this portion of the division is less volatile and has consistently outperformed relative to the school and district focus segment. In fact, teacher, family, and community focus sales here have grown significantly relative to pre-pandemic levels. With modest investment in our non-school channels and in our existing product offering, this segment of our business represents a significant growth opportunity in the years ahead. Looking ahead, we believe education is well positioned to continue stabilizing performance in fiscal 2026 with a goal of returning to growth in fiscal 2027. Turning now to our international segment, our major markets continue to benefit from the strength of Scholastic's global publishing franchises in quarter three, even as year-over-year comparisons reflected the timing of this year's publishing compared to last fiscal. During the quarter, we saw strong contributions from markets including Australia and the United Kingdom, where we continue to benefit from operational improvements across the business. Demand for English language learning materials continues to expand globally, representing a long-term opportunity as schools and families increasingly seek high-quality literacy materials. Looking ahead, we remain focused on growth and margin improvement in our international operations. In summary, our third quarter results reflect progress executing the strategy we've put in place to strengthen Scholastic's operating performance and create long-term value. The actions we're announcing today, including leverage targets and the new share repurchase authorization, including the tender offer, reflect our continued commitment disciplined balance sheet management and shareholder value creation while investing to drive sustainable growth. So with that, I'll turn the call over to Haji.