Earnings Call: Q3 2021

Mar 18, 2021

Ladies and gentlemen, thank you for standing by, and welcome to Scholastic Third Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participant lines are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Gil De Gauff, Senior Vice President and Treasurer. Please go ahead. Thank you so much, Sarah, and good afternoon, everyone. Welcome to Scholastic's fiscal 2021 Q3 earnings call. Joining me today on the call are Dick Robinson, our Chairman, President and Chief Executive Officer and Ken Cleary, the company's Chief Financial Officer. We have posted an investor presentation on our IR website at investor. Scholastic.com, which we encourage you to download if you have not already done so. I'd like to point out that certain statements made today will be forward looking. Such forward looking statements are subject to various risks and uncertainties, including those arising from the continuing impact of COVID-nineteen on the company's business operations. These forward looking statements by their nature are uncertain and actual results may differ materially from those currently anticipated. In addition, we will be discussing non GAAP financial measures as defined in Regulation G and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release filed this afternoon on a Form 8 ks, which has also been posted to our Investor Relations Web We encourage you to review the disclaimers in our press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC. If you'd like to ask a question, please send it to our IR email at investorrelationsscholastic.com, and we will respond within 2 business days. And now I'd like to turn the call over to Dick Robinson. Good afternoon, and thank you for joining our Q3 call. We started 2021 reflecting on our roots with a segment on CBS Sunday Morning focused on how for generations We have inspired and supported readers through our classroom magazines, trade titles, clubs and fairs, instructional resources for schools and more. Throughout our 100 year history, Scholastic has always been there to support educators and students as we do today, a full year since the pandemic shutdown began and Schools Closed Throughout the United States and the Globe. We are proud of our reputation and our ability To explain contemporary issues in a balanced way, to bring stories of diversity and social justice to children, and to help teachers and students learn through our magazines, books, And digital materials, not only the skills of reading and learning, but the social emotional impact of great stories and the ability to understand through information and nonfiction how the world works and how we operate our democratic system. All this is part of Scholastic's mission and daily work. Turning to our recently completed 3rd quarter, Despite the $96,000,000 or 26% decline in revenue mainly in book fairs, we were able to improve operating loss year over year because of the significant cost reductions we've made throughout the business. For the 9 months year to date, revenue declined by 30 $4,000,000 to approximately $900,000,000 this year compared to our pre COVID results last year, but our operating income only decreased by $9,700,000 excluding one time items. Our actions to change our operating model and reduce our cost base have largely offset the bottom line impact of the pandemic related disruptions and should provide operating leverage going forward as we rebuild our revenues, which is an in progress goal. As we begin the Q4, most schools across the United States returning to in classroom instruction and the climate for book fairs is improving. Book fairs have always been a key part of school leaders' calendars, And we are continuing to tailor fair formats to enable safe and flexible experiences. While schools are still unsettled and back to school patterns vary throughout the U. S, there has been an uptick in Q4 fair bookings helped by our intensified marketing programs. While the number of book fairs we will conduct in fiscal 2021 will be significantly lower than our historic norms, We are seeing a marked improvement in our in person fare counts for the 4th quarter from the low levels of the previous 4 quarters, giving us reason to be optimistic for our bookfair business in fiscal 'twenty two. In clubs, we have sharply improved the bottom line as we reengineer the business to drive profitability on reduced revenues. We've improved distribution efficiency, reduced marketing spend and increased revenue per item sold. Our pivot to at home delivery led to higher revenue per transaction from parents helping profitability. Our warehouse teams functioned well throughout the year despite difficult supply chain issues and change processes within our distribution center to reflect safety measures for the staff. These planned changes in the club business led to substantial improvements in operating income. Meanwhile, our trade education and international businesses continue strong in both revenues and profitability for the quarter 9 months year to date. In trade, we are showing continued strength in our ability to publish highly sought after titles, both in the U. S. And internationally. As a result, from fiscal 2018 through our current quarter, Trade revenues have grown by approximately 50% domestically and 30% internationally. Our expertise in curating a strong diverse lineup of titles that parents want to buy and kids want to read continues with our recent bestsellers such as the new Wings Fire Novel and Cat Kids Comic Club from Dave Pilkey. In fact, Publishers Weekly recently noted with this headline Unstoppable, our unstoppable performance in children's fiction with our titles taking a 44% of the 2020 bestseller chart And Publishers Weekly, up from 28.8 percent last year, no small feat. We are also building the audience For our iconic characters and series through an increasing pipeline of streaming, television and feature film development and have seen a wonderful response to recent properties. As just one example, Stillwater, our Apple TV animated program based on Send Shorts by John Jay Neuth has been launched in 107 countries and was just nominated for an ANA award. We also had our 2nd ratings hit on the Hallmark channel with a movie, Plain Cupid based on the book by Jenny Meyerhoff. In our international segment, we have had significant growth in profits throughout the year, thanks in part to our successful revenue increases in trade. Similar to the U. S, fare counts in Canada and the U. K. Declined, but we implemented cost reductions and set the stage for resumption of fares growth next year. In Australia, where there was a lesser impact on schools from the pandemic, fares have continued to be strong. In Asia, we are investing in new English language learning products for schools and homes and continue to expand with a local partner to develop digital content designed for English Education and Teaching Solutions in Korea. While our improved profitability in our international business was also helped by government subsidies for labor in the UK, Canada and Australia, We will manage our costs down as these subsidies drop off. Responding to increased opportunities for our education business, We are forming a new education solutions group that combines our classroom books and curriculum division with a classroom magazines, digital Subscriptions and Teaching Resource Group beginning June 1, our new fiscal year. Rose Els Mitchell returned to the company this year to lead this group, Bringing her deep understanding of the education market and proven skills in digital product development. Our new structure, which Brings the editorial strength of our Classroom Magazine Group together with our digital product team and research based instructional solutions, All supported by marketing and field selling teams will put us in an excellent position to capture growth opportunities focused on literacy improvement. The company believes it can benefit by expanding our resources and education to meet the unprecedented amount of federal stimulus funds dedicated to Supporting K-twelve Education over the next 2 to 3 years. This federal investment of $180,000,000,000 which is 3 times the normal investment in 1 year of federal money going to schools will be a game changer and learning solutions that they desperately need to prevent a prolonged learning, equity and development crisis for our young generation brought on by the challenges The child care tax credit investments in family health and support for K-twelve schools should all work together to improve the lives of children supported by schools and education. As districts reopen schools now in early 2021, They're focused on flexibility, connectivity and increased use of technology, building on lessons learned during the pandemic. Many districts are also discussing home learning as an ongoing initiative and are increasing outreach to build family engagement, especially for young learners. These are areas of Scholastic strength and we are putting our resources behind these areas that address both the urgent and longer term needs of educators. You can see this through our new learning resources such as Pre K On My Way, a curriculum program for early childhood, Which is launching this spring for purchase in Q1 of fiscal year 2022 and beyond and our redesigned summer reading offerings. Summer Reading has always been an important business to Scholastic, particularly in our education group and we have a history of supporting summer learning success with book packs and critical programs like Lit Camp. We are the ideal partner in this crucial moment Because of our deep knowledge of how to engage kids in reading and accelerate their learning. While our free summer reading program continues to serve as an entry point for many, This year, we are creating new offers, which build on what we know works well. Clubs and fairs will also be more active in our summer efforts and in this all hands on deck moment for our nation's students to gain reading skills during the summer. With our reduced cost base from our $100,000,000 cost saving program, targeted investments focused on our expanding growth opportunities and new federal funding provided much needed resources for our customers. We believe we are in an excellent position to further solidify our market leadership in literacy and learning. Our major opportunities and priorities over the next years lie in the following areas. 1st, rebuilding our fair revenue. 2nd, expanding the reach of our intellectual property through our trade and international book publishing businesses and developing more streaming television and feature film properties. 3rd, increasing investment in and expanding the reach of our education content, especially digital 4th, enabling more parents to acquire children's books directly via home shipment 5th, growing our international English Language Learning business in Asia and then supporting these 6th, continuing to make it easier for our customers to acquire product and information through our digital platforms and 7, finally, to continuing to simplify our internal processes while lowering costs. With these key priorities, we expect to increase revenue and profitability in the next years based on our ability to learn the lessons from the pandemic. Excuse me one second. And continue to adapt to the rapidly changing worlds of technology and access to information as well as improved methods of distribution. As we realize how much we have done to change our business in this pandemic year, It is clear that the Scholastic employees did an extraordinary job of adapting our services to maintain and expand the substantial value we bring to our customers. Together, we completely reimagined the way that we get books into the hands of kids. This is a significant achievement given We've We've repurposed our assets, improved capacity and delivered product in school and at home in both more efficient and customized ways and our progress should continue to provide leverage as we ramp up next year. Many employees work remotely from home for the full year. Others came to work in our warehouses adjusting to new ways of working brought on by the pandemic as well as making new delivery methods work, enabling the growth of ship to home or providing for the sale and packaging of individualized book packs sent directly to the homes of millions of children. Our success this year stems from our employees' ability to serve the customer in new and innovative ways. We thank them sincerely and deeply for defining the strength in providing reading and learning to young people. We continue to be cautiously optimistic about the 4th quarter and we are confident that our school based distribution channels will have a strong longer term recovery. We remain focused on the significant opportunities ahead while building momentum in the areas that succeeded during the pandemic, We're building also in areas that were most deeply affected and gaining leverage from our cost reduction programs. In our challenging 100th year, Scholastic once again proved its ability to move decisively in new ways to make reading and learning available to children, parents, teachers and schools schools and families in helping children learn and grow. With that, I will pass the call to Ken Cleary. Thank you, Dick, and good afternoon, everyone. Today, I will refer to our adjusted results for the Q3, excluding one time items unless otherwise indicated. 3rd quarter revenue was $277,500,000 a year over year decrease of 26% compared to the last year 2 largely to lower sales and book fairs, as Dick mentioned. Operating loss was $11,900,000 compared to a loss of $16,800,000 last year. Net loss was $4,800,000 compared to a loss of $11,900,000 last year. Adjusted EBITDA was 14 point $5,600,000 last year and loss per diluted share was $0.14 compared to $0.34 last year. Though we had lower revenues, our actions to reduce costs and scale our operations result in improved bottom line results and effectively safeguard our cash position. We also benefited from certain COVID related wage and rent subsidies, mostly in our international business. This was slightly offset by increased postage and shipping charges this holiday season due to parcel carriers' limited customer capacity and increased pricing and surcharges. Over the course of the quarter, we continued to optimize our distribution network and reduce our warehouse and office footprint. In the U. S, we exited satellite office space in New York City and commenced a network optimization plan in our book fairs distribution network, resulting in the permanent closure of 12 distribution branches, while retaining our capacity to reach our customers due to our improved logistics capabilities and delivery methods. In our U. K. Operations, we sold a now redundant distribution facility. We continue to pay our operating expenses, limit discretionary spending and better align our inventory purchases to match expected sales volumes, leading to the achievement of our $100,000,000 cost saving target. Approximately half of these savings will be permanent and will result in improved profitability as we rebuild our revenue base beyond the current fiscal year. Mainly these cost savings were enabled by the technology and related process changes that we have been implementing over the past 5 years. Our balance sheet remains solid, supported by our cost management and working capital controls. Net cash from operating activities this quarter was $16,400,000 compared to $29,700,000 last year despite the decline in revenue of $95,800,000 free cash flow for the quarter was $5,500,000 compared to $4,900,000 last year. Year to date, net cash from operating activities was 36 $500,000 compared to $44,000,000 last year and free cash flow was $1,500,000 this year compared to a use of $25,900,000 last year as our capital spending continues to decline from the high investment levels of previous years. At the end of the quarter, cash and cash equivalents exceeded total debt by $162,500,000 compared to $247,700,000 last year and $161,800,000 last quarter. These figures are the direct result of our stringent initiatives to preserve our cash position and the expected decline in capital investments. Turning now to our segment results. In children's book publishing and distribution, revenue decreased by $78,900,000 to $141,300,000 largely due to a lower number of in school fairs in the quarter. In clubs, revenue also decreased as part of our strategic shift to reduce costs and improve profitability. In the clubs business, we have reduced costs by leveraging digital technology to reach our customers and focusing our offer plans based upon customer buying patterns. Additionally, we quickly pivoted and offered our parent customers the option to receive shipments directly at home, a well received service during the pandemic, which also helped drive an increase in parents' order size. These school channel declines were partially offset by continued trade performance. Revenue was driven by a strong front list titles such as Cat Kid Comic Club by Dave Pilkey, the Baby Sears Club Graphic Novel No. 9 and Harry Potter and the Sorcerer's Stone MinaLima Edition. Our cost savings actions have continued to mitigate the impact of COVID disruptions on our fares business, and a more streamlined structure will provide improved profitability moving forward. Our book fairs distribution network optimization activities resulted in one time lease asset impairment and branch consolidation costs of $2,900,000 Excluding these one time items, segment operating loss was $3,700,000 in the current quarter, down $5,900,000 versus last year. In Education, revenue decreased by $8,000,000 to $66,300,000 down 11% in the quarter where we had a tough comparison to last year pre pandemic when we delivered a large sale to the Houston Independent School District. In the quarter, we increased sales of take home book packs and Teaching Resources Early Years and Workbooks, demonstrating our ability to meet changing customer needs during the pandemic. Digital subscription programs also remain in high demand with digital bookings increasing by 41% in the quarter. Segment operating income was $10,100,000 up by 3% due to operating cost reductions. In our international segment, revenues were $69,900,000 down $8,900,000 from last year due to continued COVID related disruptions for fares in Canada and the UK and lower direct sales to Asia. There was a $3,500,000 favorable impact from foreign exchange as the dollar weakened. Operating loss improved to $900,000 a $2,800,000 improvement versus last year due to cost reductions in certain COVID related government wage and rent subsidies in Australia, Canada and the UK. While we are not providing outlook for the fiscal year, we will provide additional color on the factors impacting our business. As more schools resume in person instruction As we continue our intensified marketing efforts, there has been uptick in spring fair bookings. We're focused on the customers who are most likely to hold fairs this based on their learning modes and we'll continue our intensified marketing outreach for the fall season. As Dick mentioned, We're also amplifying our summer reading campaigns to meet the need for resources supporting students' continued learning, leveraging our connection to educators, parents and students as they solidify summer learning plans right now. These programs and offers have started rolling out through all of our channels and sales will carry over into June. We expect another strong spring front list from our trade division with new titles from many of our top selling properties and authors. In summary, the actions we took over the last year were necessary, given the disruptions that we faced along with our customers and partners all around the world. The upside is that we now have a lower cost and more flexible infrastructure that will provide operating leverage as we grow our revenues next fiscal year and further into the future. With that, I hand the call back to Gil. Thank you, Ken. As a reminder, we invite questions to be directed via email to investorrelations atscholastic.com. We will respond to your queries within 2 business days. And now, I'd like to turn the call back over to Dick Robinson for closing comments. Thank you all for joining the call today. We're looking forward to this quarter, our final quarter of the year and to the fiscal year 2021 and now ahead to FY 2022 as we see a strengthening market and improving operations for the company. Thank you so much for listening today. We'll look forward to talking to you in July.