Good day, ladies and gentlemen. And welcome to the Scholastic Reports Fiscal 2016 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today’s conference call, Mr. Gil Dickoff, Senior SVP and Treasurer. You may begin, sir.

Kevin, thank you so much, and good morning, everybody. Before I begin, I would like to point out that the slides of this presentation are available on our investor relations website, that can be found at investor.scholastic.com. I'd also like to note that this presentation contains certain forward-looking statements, which are subject to various risks and uncertainties, including the condition of the children's book and educational materials markets, and acceptance of the company's products in those markets, and other risks and factors identified from time to time in the company's filings with the SEC. Actual results could differ materially from those currently anticipated. Our comments today include references to certain non-GAAP financial measures, as defined in Regulation G. The reconciliation of those non-GAAP financial measures with the relevant GAAP financial information, and other information required by Regulation G, is provided in the company's earnings release, which is also posted on the investor relations website at investor.scholastic.com. Now I'd like to introduce Dick Robinson, the Chairman, CEO and President of Scholastic, to begin today's presentation.

Thank you, Gil. Good morning, and thank you for joining us today. We had a solid third quarter, with strong execution in our global children's book and education businesses. Our leading position in children's books, combined with current market trends that are well aligned with our strength both in distribution and publishing, has continued to be a key driver of growth. The marketplace for children's books from early childhood to young adult has grown over the past 5 years, even as the adult trade business has softened. This growth has stemmed in part from the strong focus in schools on the importance of children's literature and improving children's reading, both in instruction, and through independent reading. In addition, parents are buying more books for the very youngest children from zero to four, driving expansion of the market in the earliest years. As a result of this new market dynamic, retailers are now dedicating more space to children's books. Similarly, where Scholastic is making reading available in more than 80% of the schools, our opportunities continued to increase for pre-K to 8 literacy curriculum and services. More and more schools and district administrators are turning to us for help in assessing their specific literacy needs, and partnering with us to help them with customized solutions, including professional development. As reported, revenue for the third quarter was $366 million, an increase of 6% from last year. Excluding one-time items, our operating loss was $8.1 million, a 51% improvement compared to an operating loss of $16.5 million last year. The loss per share, excluding one-time items was $0.06 versus $0.33 in the prior year period. As you know, the third quarter is a seasonally low revenue quarter, and one in which we typically report a loss. In children's books, our third quarter trade…

Thank you, Dick. And good morning everyone. Revenue for the quarter increased 6% or 8% net of currency translation, driven by our children's books, trade and book clubs in particular and classroom books and classroom magazines. As you know, the third quarter is a seasonally lower revenue quarter and one in which we typically report a loss. Excluding one time items, operating loss this third quarter was $8.1 million or $0.06 per share, compared to an operating loss of $16.5 million or $0.33 per share last year. One time expenses for the quarter amounted to $0.15 per share, which included non-cash impairment charges for certain legacy pre-publication assets in our children's book and education segments, as well as severance associated with our cost reduction programs. As a reminder, we had one-time expenses of $0.15 per share last year. In children's book publishing and distribution, revenues grew year-over-year by 7% to $220.2 million and operating income, excluding one-time items, was $6.5 million versus a loss of $2.8 million last year. Book clubs grew by 4% due to higher order volumes, book fairs was down by 1%, as some fairs shifted to the fourth quarter, although we did have higher revenue per fair held. Operating income also benefited from lower product and promotion cost in book clubs. As we look ahead, we are very excited about the upcoming trade releases including Everland, a new young adult title coming in May and the ninth book in Wherever After series, which will be released in April. In education, Q3 revenue increased 17% to $63.5 million and operating income rose by 88% to $6.2 million, excluding the previously mentioned impairment charge. Higher sales volume in the quarter was partially offset by investments to expand our sales force, to accelerate growth in this segment. Performance in…

Kevin, thanks, we are now ready to open the lines for questions.

[Operator Instructions] Our first question comes from Drew Crum with Stifel.

Okay. Thanks. Good morning, everyone. So Maureen, want to better understand how you are thinking about free cash flow going forward and I guess I'm looking beyond fiscal 2016. It sounds like the investments you're making in the corporate headquarters may run past fiscal '17. And I'm not sure what you're anticipating in terms of royalty advances beyond this fiscal period, but it sounds like you've got a very strong pipeline of content coming next year. So just want to better understand how you're thinking about normalized free cash flow for this business, over the intermediate to longer term. Thanks.

Well, you're correct, we have had royalty advance increase this year and we may have some next year. We'll figure – we'll define that as we release our guidance for 2017. As far as the corporate investment, that is a 2 year investment. So I think you can assume our cash flow returns to the historical levels after that two-year investment period is over.

Okay. And then you also mentioned in your preamble the investments you're making in technology, and that would run through fiscal '18. Should we anticipate a flat line spending level the next two fiscal periods, or should we anticipate a step up in investments there?

It should be comparable to the current year investment spending.

Okay. And then Dick, you made a comment on the Harry Potter release in July, any thoughts on the movie tie-in books that you have coming in the next couple quarters? And just taken all together put some perspective around how collectively the content strategy looks, compared to some of the big releases you had in prior years?

Well, Harry Potter remains a tremendously strong franchise, and it's the renewed interest in JK Rowling in the franchise has begun to up-tick now with the announcement of the play coming in July, and the new Fantastic Beast film in November. I'll ask Ellie to detail the sequences of these publishing releases, because there's quite a few of them coming over the next 12 months.

Hi. Even in anticipation of the play that is opening at the end of July, we have seen tremendous interest in the back list. Of course, this year, we published the illustrated edition of Sorcerer's Stone, which exceeded our expectations and we have the coloring books, which are driving tremendous sales, and again renewed interest in Harry Potter. So in July, the end of July 31, we will with publishing the script book, tying into the play that is opening in London's West End. There's a lot of excitement starting about that and we're working closely with our retailers to see how - to laying down that product. And after that does come the movie release in November of this year, and we will be publishing a rich program of tie-in books, movie handbooks, sticker books, a wide range of things, to appeal to a wide audience. We will also later in the fall, have the next illustrated edition, Chamber of Secrets, which again we're very excited to be publishing, and again we'll be tying - doing tie-ins for the three movies coming up over the next six years.

Okay. Do guys - Ellie, do you have both print and digital rights for those movie tie-ins?

We have digital rights to the first movie tie-ins.

Okay. And the script book, is that a digital right as well?

No, we only have the print rights for that.

Okay. I'll jump back into the queue. Thank you.

Our next question comes from Barry Lucas with Gabelli & Company.

Thank you, and good morning. A little bit of nuts and bolts related to the guidance. This quarter, seasonally small, was probably better, much lower loss than last year, and less than I would have anticipated. You had discussion about some fair business being shifted into the fourth quarter, and at the same time, you're generating higher revenues per fair. So why wouldn't the guidance have been a little bit better for fourth quarter and full year?

Well, I'll let Maureen detail that. Remembering, Barry, most of our profits come from the fourth quarter. We're highly leveraged on the fourth quarter, particularly in the education business, but really in all our businesses for the profits. So we're hesitant to change the guidance at this point, even though we had a good quarter, and we do have some continuing cost issues that we're keeping our eyes on. Plus the international business continues to be rocky with the - we flattened out a bit in Asia as we indicated, and the impact of currency has been really very strong on our revenues this year. As we've announced we're $38 million of currency impact on our revenues in international for the first nine months, and we expect that to continue in the quarter, fourth quarter. Maureen, would you want to detail any more about this fourth quarter, and Barry's interest in the guidance?

Yes, I think as Dick mentioned, we had a very large quarter in our children's book business last year, and we are expecting growth again on that this year, so that is something that is anticipated in the fourth quarter. And the fairs moving to the fourth quarter, we're expecting growth from that as well. I think if you look at our year-to-date numbers, because of our results, particularly in international due to FX, as well as the impact of buying the US dollar product, you look at the year-to-date results, although we're up in revenue, there has been an impact on our margins, and also the strike in Ontario affected our results in the year-to-date period. So on a year-to-date basis if you look at our operating income, it is still down from the prior year. So we need to increase our operating income in the fourth quarter to meet our guidance.

Okay. One question about the real estate and the investment that you are making in the building, currently. If I were a high-end retailer, such as many of the tenants in and around the neighborhood. I would probably want to have some meaningful input into the renovation, reconstruction, and the look of my selling space. So you're putting money into the building ahead of a tenant being signed up. I'm just wondering how you balance that.

Well, there are two parts of this, Barry. First, we're simply clearing out the retail space on the first floor, which as you know, having come into the building, we have to take out the escalators, the elevators and so forth and so on in that space, as well as preparing the box for the retailer. Our discussions with retailers have already begun, so as we make the basic adjustments, we're already in touch with them and also our current tenants, Sephora and Hugo Boss, about what we are doing in the building. So both new retailers that we would be talking to, as well as our existing tenants, are very much aware of what we're doing in the building, and have input into it. It's a good question. But I think we are covered for our partnership with the new retailer coming into the building. We're not going to create a space that they don't want, and we've given a great deal of thought to that already, as we have thought about our second floor, and how that might work.

Great. Thanks, Dick.

[Operator Instructions] And I'm not showing any further questions at this time.

In that case, we want to thank you all. We had a strong third quarter. We look forward to our fiscal year-end call in July, and we will talk to you further again. Thanks so much for your interest in Scholastic.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.