Scholastic Corporation (SCHL) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by. And welcome to Scholastic’s First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host, Senior Vice President, Treasurer and Head of Investor Relations, Gil Dickoff.

Thank you and good afternoon. Welcome to Scholastic’s first quarter fiscal 2022 earnings call. Joining me on today’s call are Peter Warwick, Scholastic’s President and Chief Executive Officer; and Ken Cleary, our 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 would 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-19 on the company’s business operations. These forward-looking statements by their nature are uncertain and actual results may differ from those currently anticipated. In addition, we will be discussing some 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-K, which has also been posted to our Investor Relations website. 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 have any questions after today’s call, please send them directly to our IR e-mail address, investor_relations@scholastic.com. And now, I would like to turn the call over to Peter Warwick to begin this afternoon’s presentation.

Good afternoon, everyone, and thank you for joining the call today. Back-to-school is always an important time at Scholastic and this year that’s no different. In fact, it may be one of the more important moments in our history. For many students and teachers, it’s been nearly two years since they entered the classroom together. Just this past week, I reached out to more than 2 million of our nation’s teachers with a message and a promise to them, that scholastic is not only a constant, that they can rely on but that we are eager to be side-by-side with them meeting their real time reading, literacy and learning needs. As one teacher responded, and I quote, every day is a new opportunity for my students to start and learn new things as they missed so much last school year. All of us at scholastic couldn’t agree more. As the first quarter of our new fiscal year showed, we have nimbly supported educators, families and children in literacy and reading. While this is historically a relatively quiet quarter for the company, we worked with fervor and a clear focus to increase access to books and reading over the summer and then seamlessly shifted to back-to-school offerings to help support learning, acceleration and social emotional healing. All of these efforts led to a 21% increase in revenue versus prior year and an improvement in our seasonal first quarter operating loss which should reduce by 44% compared to the same period last year. Trade Publishing and Education Solutions in particular, drove positive results for the company and we anticipate continued strength in both of these areas going forward. Ken will go into further details around our first quarter results. But overall, we are pleased that the momentum reported in our business from the close of fiscal year 2021 is largely continued and we are optimistic about this fall. At the same time, while we are encouraged to see so many children around the world returning to the classroom, we are staying in close contact with our school partners to ensure that we are well positioned to respond to any changes in the landscape as the pandemic lingers. In our all important School Distribution channels, the summer’s traditionally less active for our company. However, in this unusual year, we use this time period as a pulse check to gauge how our customers feel about the fall. We know teachers are stepping up to create safe and welcoming environments for their students, even as they have concerns around their own well being and making up for lost time. In recent weeks we have seen higher engagement from our Book Clubs teacher sponsors and in our book fairs, we have seen higher revenue per fair. School communities see these experiences as critical pieces of the return to normalcy and supportive of their learning goals, as a child’s sense of personal choice around books, is an empowering experience that uniquely engages them in reading. And that’s leading to an energy and appetite to host fairs, with full bookings running ahead of management’s expectations. Overall, we continue to expect incremental improvements in a number of case fairs held and remain cautiously optimistic. In our Trade Publishing, our exemplary track record continues with topline growth increasing 27% in fiscal 2022 quarter one, compared to fiscal 2021 in the same timeframe. Our content continues to resonate with the success bolstered by creative marketing and publicity. We are also benefiting from strengthened connections to parents, as a result of the company’s pivots to support families during COVID. Among our recent successes, Time named three Scholastic titles to their list of the 100 best Young Adult Books of all time and Brian Selznick’s forthcoming book Kaleidescope received a shining review in the New York Times just last week. We are also eager to see families fall in love with J.K. Rowling’s forthcoming book The Christmas Pig to be published in October. This title based on pre-sales is already a leading bestseller on the Amazon Holiday list. Our expertise in helping children navigate the world around them is also evident by the continued success of titles such as refugee from Alan Gratz and his latest Ground Zero, which was published in advance of the 20th Anniversary of 9/11. And there remains no doubt that Dog Man and our graphics Baby-sitters Club are cemented as popular draws. Finally, our strategic growth around leveraging our powerful IP continues to gain traction. Puppy Place, a live action scripted series based on our best selling series of the same name by Ellen miles premieres October 15 on AppleTV+. On the heels of an impressive year, our now formally combined Education Solutions segment reported an increase in revenue of 49% versus the prior year period. This new structure brings all the key strengths of our multiple channels within the segment to the forefront. Rose Else-Mitchell has formed a leadership team that now includes our new Chief Academic Officer, former Interim Chancellor of DC Public Schools, Dr. Amanda Alexander, as well as fresh expertise in product development and digital marketing to help design and position solutions to meet the immediate needs of educators, while planning for the future growth. While keeping the benefits of our tried and true whole school and classroom library collections, which pivoted exceptionally well during the pandemic with Grab and Go packs, we also saw high performance from our digital product suite, which now includes the universal access teacher dashboard, as well as the new bilingual and blended pre-K curriculum. And responding to the needs of the hybrid market, our K-12 classroom magazines have continued to innovate and are rebranded as Scholastic Magazines+, signaling to our customers the increasingly flexible and desirable mix of both prints and digital features, as well as instructional tools to use in-person or remotely. All of this is unfolding against the backdrop of landmark federal funding for K-12 schools to support the learning acceleration of our students. In International, the decrease in revenue this past quarter is a reflection of how and where COVID has caused new or continued disruptions. Similar to the U.S., we anticipate that as restrictions lift, our recovery will resume in these disrupted areas and we will simultaneously continue to focus on our growth opportunities in Asia. I spent the past two months listening to my colleagues and deeply engaging in my new role as CEO. As I have been inspired by the Scholastic mission during my tenure as a Board member, I now stand impressed by what I have witnessed firsthand from our employees in their day-to-day work. We are committed to our mission, we have an unparalleled content, proprietary distribution and we have deep relationships, all making our company unique in our ability to serve children. In this coming year we are energized to meet the clear demand we are seeing for our offerings. It’s evident that while we won’t reach pre-pandemic levels in the near-term, book fairs are on the rise and educators are eager to refresh their classroom libraries through our collections, as well as through our clubs and they are delighted by our expanded offerings. While we will need to navigate ongoing industry-wide challenges that could potentially affect our performance, such as labor shortages, supply chain issues, paper procurement in both inflationary and COVID-related pressures, we continue to believe that our previous cost saving actions and identification of strategic measures will significantly mitigate these effects. Finally, I’d like to welcome our newest Board member, Verdell Walker, Head of Kids Audio Content with Spotify, Inc., elected yesterday during our Annual Shareholders meeting. Verdell brings a shared passion for brilliant content creation for children and a prominent career in the area of children’s entertainment and media. A point of view and eye for modernization will surely be a beneficial addition to our Board. And with that, I’d like to turn the call over to Ken Cleary.

Thank you, Peter. Good afternoon. Today, 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 severance and legal settlement costs. As we start the new fiscal year and our school, teacher, parent and student customers return to in-person learning, we are faced with both opportunities and challenges. As Peter mentioned, our first quarter is typically quiet for a school book fair and Book Clubs channels. However, strong performance in our education solutions and trade channels drove first quarter revenues to $259.8 million, compared to $215.2 million last year. Operating loss in the first quarter was $36.2 million, compared to an operating loss in the prior period of $45 million. Adjusted EBITDA for the first quarter was a loss of $13 million, compared to a loss of $15.9 million last year and a loss per diluted share was $0.79, compared to a loss per diluted share of $0.90 in the prior fiscal quarter. Sales volume significantly outpaced higher employee-related costs in the current period. Employee costs were lower in the prior period as our employees were on furlough or reduced work week due to COVID-related actions through the end of August of last year. While our employee costs were higher than last year, we are pleased to see the uptick in our productivity and then in our cost containment efforts initiated last year continue to provide operating leverage as we have lowered our annual ongoing operating costs by approximately $50 million from historical levels and we are on track to achieve these savings. The company generated positive free cash flow for this quarter of $49.1 million, compared to free cash used of $34.9 million in the prior period, largely due to the receipt of a federal tax refund of $63.1 million. Borrowings under the company’s domestic credit facility are now $75 million, reflecting the pay down of $100 million in the current quarter. Now turning to our segments, in Children’s Book Publishing and Distribution, first quarter revenue increased 25% to $115.8 million versus the prior year period. Trade revenues grew $19.7 million due to strong sales of our series publishing and strong backlist titles, including higher sales of Harry Potter box sets and limited edition foil covers for Dog Man driven by marketing and publicity activities. While the first quarter is not traditionally a significant quarter for our school-based distribution channels, we are seeing strong demand as schools begin to reopen in this fall, with Book Clubs sponsor activity on the rise and book fair bookings increasing sequentially this fall from last spring. First quarter segment operating loss was $21.7 million as compared to an operating loss of $29 million in the prior fiscal quarter. In Education Solutions, revenue in the first fiscal quarter grew 49% to $80.1 million versus the prior year period. Segment results benefited from increased demand for our summer learning offerings, and higher sales for supplemental and core instruction products, especially in the newly launched early childhood program, PreK On My Way. Digital product subscription sales also increased and our Magazines+ products experienced improvement with a 13% increase in sales and subscriptions, which will benefit the company in future quarters. First quarter segment operating income was $7.3 million versus an operating loss of $2.4 million in the prior fiscal quarter, driven by the record sales. In our International segment, first quarter revenues decreased 8% or $5.4 million versus prior year. Australia experienced new lockdowns due to COVID variant, which caused interruptions to our local markets and in-classroom learning. The pandemic also continue to negatively impact our markets in New Zealand, as well as the direct sales business in Asia. In addition, the majority of the COVID related wage and rent subsidies have ended or have been reduced from prior year levels. In the first quarter, International had an operating loss of $1.3 million versus operating income of $5.8 million in the prior fiscal quarter. Corporate overhead expense was $20.5 million, compared to $19.4 million, remaining relatively flat as the company continues to closely monitor discretionary spending. As we look to the remainder of the fiscal year, we are encouraged by strong demand signaled by our customer base as they return to in-person learning. We are matching our capacity to this increased demand in difficult supply chain and labor markets. Our trade channel continues to have strong frontlist and backlist titles with 19 of our books currently on the New York Times’ best-seller list. Additionally, the company is seeing substantial pre-orders for J.K. Rowling’s The Christmas Pig, which will be released in October and expect strong sales of Dav Pilkey’s second installment in the Cat Kid Comic Club series, which will be released November 30th. The costs have increased for product, printing and paper across all the company’s channels. In response, the company has continued to diversify its supplier base, including increased North American sources and it’s actively planning manufacturing activities based upon available paper supplies. Procurement lead times have increased and we are ordering product as early as possible to meet our increased demand. Our book fairs channel is seeing substantially higher bookings for this fall than we experienced last spring. We have reopened our 43 book fair distribution facilities from COVID-related closures and are on track to meet our warehouse and driver staffing requirements. During the summer, the company initiated an intensive hiring plan as book fair distribution facilities inclusive of higher wages and other employee incentives to ensure that we achieve the capacity requirements to deliver fairs to our customers. Demand for our Book Clubs offerings this September has also increased from early last year when many schools were closed. Higher teacher, parent and student engagement is leading to increased order quantities. The company has sufficient product to meet this increased demand, but warehouse staffing resources at the company’s Jefferson City, Missouri, facility are limited, as a result, we have experienced some current backlog of orders for our Book Clubs’ channel. The company has recently increased its efforts to staff this facility, inclusive of higher wages and employee incentives. We expect to work through the backlog over the next few weeks. Education Solutions continues to see strong demand for in-classroom materials and digital content, bolstered by new product, a need for digital content and functionality and our customers’ access to federal funding. The second and third quarters of the year generally produce lower sales volumes for Education Solutions. Our International segment expects effects of the pandemic to continue into our second fiscal quarter in Australia, New Zealand and Asia. Australia and New Zealand are experiencing significant lockdowns and school closures. Canada and U.K. school channels are returning to a more normal school year, albeit not at pre-pandemic levels. Additionally, the company is providing new offerings to its China franchise customers in response to recent government regulations. The company expects strong cash flow to continue into the second quarter and the remainder of the year. In addition to the $63.1 million federal tax refund, we also received an insurance settlement of $6.6 million from the primary insurance carrier of our recent $20 million legal settlement, which we paid in early September. Full year cash flows will benefit from the continuing collection of Trade and Education Solutions’ receivables, and the return of higher revenues from our school channels. Cost savings from last year’s initiatives will be partially offset by higher costs for product, paper, printing, transportation and labor. Given the strong cash flow forecast, we anticipate sufficient liquidity for debt repayment and our share buyback program. We are in the process of negotiating a new credit facility consistent with the company’s expected needs as the current facility expires January 5, 2022. I thank you for your time with us this afternoon and your interest in Scholastic. With that, I will pass the call back to Gil for closing.

Thank you very much, Ken. As a reminder, we invite questions to be directed to our IR mailbox, investor_relations@scholastic.com. We appreciate every one’s time and continuing support. And as always, thank you for joining today’s call.

This concludes today’s conference call. Thank you for participating. You may now disconnect.