Good day ladies and gentlemen and welcome to Scholastic Reports Fiscal 2019 Third Quarter Financial Conference Call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder today's conference call may be recorded. It is now my pleasure to hand the conference over to Gil Dickoff, Senior Vice President, Treasurer and Head of Investor Relations.

Thank you and good afternoon everyone. Welcome to Scholastic's third quarter 2019 earnings call. With me here today 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 Web site at investor.scholastic.com, which we encourage you to download, if you have not already done so. I would like to point out that certain statements made today will be forward-looking. These forward-looking statements by their nature are uncertain and may differ materially from actual results. In addition, we'll be discussing some non-GAAP financial measures as defined in Regulation G and the reconciliation 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-K which has also been posted to our Investor Relations Web site. 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. And now, I would like to turn the call over to Dick Robinson.

Good afternoon and thank you for joining our call. We had a solid third quarter with strong results globally in trade publishing and are on plan for book fairs and education in the U.S. As reported, third quarter sales increased by $15.4 million or 4% higher year-over-year. Year-to-date, revenues are up $51 million or 5% primarily driven by outstanding trade publishing results worldwide. This quarter's results reflect three major themes. First, continuing strength in children's book publishing and distribution. Business in this segment remains strong with an 8% gain overall, and a 25% gain in trade, which includes a significant jump in revenue from media. Scholastic continues to excel in brand and series publishing including the global bestseller Dog Man by Dav Pilkey which tops children's bestsellers every week and is currently led by Dog Man: Brawl of the Wild, the sixth title in the series. The Wings of Fire series expanded its success with the release of its 12th book, The Hive Queen; and The Baby-Sitters Club now with smashed success in graphic novel format saw its latest title Kristy’s Big Day entered the list of top sellers. The Harry Potter World continues to capture audiences' attention most recently with Fantastic Beasts: The Crimes of Grindelwald. Owl Diaries now including 10 titles continues to be a top series and just reaching the list of best sellers is I Need a Hug. The new award-winning picture book from Aaron Blabey, our author, illustrator best known for the Bad Guys series originally published in Australia. Expanding the impact of our publishing program, Scholastic Entertainment has exciting momentum as our iconic brands are brought to new life on streaming platforms. Our Evergreen Clifford programming library recorded significant sales in the quarter through license to Amazon Prime Video, while anticipation continues to grow…

Thank you, Dick. Good afternoon. This afternoon, I will refer to our adjusted results from continuing operations for the third quarter excluding one-time items unless otherwise indicated. As discussed last quarter, we have adopted the new revenue recognition guidelines under ASC 606 this fiscal year. Prior periods results have not been restated. As we review the quarter sales and operating income, I will highlight the impact of these new standards on the period's results. Revenues were $360.1 million versus $344.7 million in the third quarter last year an increase of 4%. The current quarter's reported revenue was $9.4 million higher through the impact of ASC 606 basically awash with the unfavorable impact of ACS 606 on our second quarter sales. Operating loss in the seasonally low quarter improved to $18.7 million versus a loss of $19 million a year ago. We had $2.7 million in one-time items impacting our operations in the quarter, which included $2.2 million of onetime severance taken in connection with our cost improvement programs in $500,000 related to a warehouse consolidation in Canada. In the third quarter of fiscal 2018, we had $4.7 million in onetime charges above the operating line. While not components of operating income, the prior periods results included a non-cash pre-tax charge of $39.6 million or $0.76 per share related to the termination of our defined benefit pension plan in the U.S. and an $8.3 million or $0.24 per share charge for the re-measurement of our U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act of 2017. Adjusted EBITDA for the third quarter was $1.4 million compared to a loss of $2 million last year. For the first nine months of the year our EBITDA is up 29% as adjusted EBITDA continues to improve at…

Thank you. We are now ready to open up the lines for questions.

Thank you, sir. [Operator Instructions] Our first question will come from Andrew Crum with Stifel. Your line is now open.

Okay, thanks. Hey guys. Good afternoon. So, as you addressed the inflationary pressures on input costs and the Wayfair decision, how do you see that impacting fiscal '20? Is it margin dilutive or do you feel like you have a handle on it where it's not going to be a drag on operating results?

Hi, Drew. This is Ken. So, yes, in terms of the sales tax, we've put a comprehensive program in place and we've just rolled that out this quarter. So, our intent is to cover the sales tax expense fully. That may take some time, but we did have a drag on our P&L previously. So, the goal for FY'20 would be really to get back to sales tax neutral to where we were previously. And then ultimately, we think we have an opportunity to fully recover any sales tax leakage we had in prior years.

Okay. And on the input costs?

Oh, I'm sorry. Yes. And in terms of the inflationary pressures, a lot of that has come through already, and as we continue to deploy different technology and really try and leverage our operations across the organization, we do have efficiencies in place. So, we do have -- we have a substantial efficiency program this year, which -- some of which was offset by those inflationary pressures, and we again have a continuing program that you should try and get back even more of the cost next year.

Okay. I guess shifting gears, very good quarter for the trade business. How are you thinking about the frontline, the front lift for the fiscal fourth quarter? And are there other opportunities to monetize the portfolio through streaming deals similar to the Clifford deal that you referenced with Amazon?

We've had a terrific trade year so far, Drew. This is Dick answering your question, and we've done really extremely well. We had a 25% increase in sales in the quarter that included the sale to Amazon of our Clifford programming library for certain uses for Amazon and was part of a larger deal that included some future Clifford programming that we'll start on Amazon in the fall. That of course will help our whole Clifford enterprise in terms of marketing, merchandising, branding, new publishing and so forth and so on. So, we see significant opportunities from the expansion of the Clifford franchise through streaming. There's a lot going on in the streaming world as I don't need to tell you, and we have lots of activity with Netflix where we've got -- Netflix in particular where we have several programs going forward. We've got other deals in the works with other players. And we've got about 15 different projects going on right now in combination of our own production or outside production being financed by various of the streaming services. It's great -- in children's programming presents itself extremely well to helping the people who are trying to get their subscriptions purchased for the whole family. So, there's terrific opportunities for us. The main benefit to the company overall, of course is in increased book sales as well as in merchandising opportunities. So, it's a very good time for our media business. We have a great new small staff that is doing a terrific job working with a whole range of program creators and developers and streaming services.

And just to follow up the front lift for the trade business for the fourth quarter?

For the fourth quarter, yes, we've had such a good quarter. We're a little -- we're not forecasting a significant lift compared to last year in the fourth quarter. We hope we'll get it, but we're not counting on it in this quarter, but the trade list going forward and the momentum we have in the business is really quite striking, and it's also global because our Australia and Canada and U.K. trade businesses are all up. We're selling more in China. So, we've really got a very robust program ahead and some great new titles including the ongoing Pilkey titles, which have been bestsellers every time across the board for Dog Man in particular.

Okay. And then, can you remind us what your expectations are for Education revenue growth in the fiscal fourth quarter. Obviously, it’s seasonally very important, what are some of the puts and takes around exceeding that objective. And I guess looking ahead to fiscal '20, remind us what reading adoptions you're competing in and any willing to size what the opportunity is there?

Sure. Well, we've actually been quite surprised by the extremely positive -- not that we're -- not that we think we had a bad program, but we had a wonderful program. But, we were kind of unprepared for the way the market has responded to it. It's really been amazing. And so, we've got -- we already have some sales that we have made during the spring which will be turned into revenues in the summer as you know. We do have to focus on selling our supplementary backlist product, backlist and front list product in the fourth quarter. So that's still something we are very, very focused on while our sales team is also introducing Scholastic Literacy. Going forward, I think we will begin to see some impact from this business in the summer of -- in this first quarter of 2020. We are not sure what the size of that will be, but it will certainly be new revenues for us because we haven't been in the core business for quite a while. And we're back in it again with a fantastic program that's meeting the needs of schools in a way that we're happily -- we thought we would do, but we're happily surprised to find out. Just the dimensions of those, for next year we're not sure what it will be, but there will certainly be an increase in the category of core in the summer that should be noticeable.

And then, should we expect to see some margin pressure given the investments there or pretty much through most of the investments and hence you get operating leverage from the sales contributions?

Well, in the first quarter, we will see some profit coming from those sales. We have been investing as you know, we've increased our sales staff. We've increased our pre-pub spending over the past 24 months in education and that certainly hit the P&L this year. We'll continue to have those costs. They shouldn't increase very much, so we should be getting the incremental lift from the profitability from the core sales which will carry of course depreciation and amortization for the pre-pub spend okay.

Okay, guys. Thank you.

Thank you.

Thank you. [Operator Instructions] And I'm showing no further questions over the phone. So, now, it is my pleasure to hand the conference back over to Mr. Richard Robison, Chairman, President and Chief Executive Officer for any closing comments or remarks.

Well, thank you all for listening to our third quarter call. We're optimistic about the future. We feel we've got a great new program in Scholastic Literacy. We've managed to collect our sales tax. And we have a number of other wonderful things going on in our trade business globally. So, we'll hope to report on these in our July call. Thank you very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.