Scholastic Corp. (SCHL) Q3 2021 Earnings Call Transcript

Scholastic Corp. (NASDAQ: SCHL) Q3 2021 earnings call dated Mar. 18, 2021.

Corporate Participants:

Gil Dickoff — Senior Vice President and Treasurer

Richard Robinson — Chairman of the Board, President and Chief Executive Officer

Kenneth J. Cleary — Chief Financial Officer

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic Third Quarter Fiscal Year 2021 Financial Results Conference Call.

[Operator Instructions]

I would now like to hand the conference over to Gil Dickoff, Senior Vice President and Treasurer. Please go ahead.

Gil Dickoff — Senior Vice President and Treasurer

Thank you so much, Sarah, and good afternoon, everyone. Welcome to Scholastic’s fiscal 2021 third quarter 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’ve 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-19 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 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’d like to ask a question, please send it to our IR email at investor_relations@scholastic.com, and we will respond within two business days.

And now, I’d like to turn the call over to Dick Robinson.

Richard Robinson — Chairman of the Board, President and Chief Executive Officer

Good afternoon, and thank you for joining our third quarter call.

We started 2021, reflecting on our routes with a segment on CBS Sunday Morning focused on how for generations we’ve 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 non-fiction 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 third quarter, despite the $96 million 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 nine months year-to-date, revenue declined by $304 million to approximately $900 million this year compared to our pre-COVID results last year, but our operating income only decreased by $9.7 million, 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 fourth quarter, most schools across the United States are 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 US, 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’re seeing a marked improvement in our in-person fair counts for the fourth quarter from the low levels of the previous four quarters, giving us reason to be optimistic for our book fair business in fiscal 2022.

In clubs, we have sharply improved the bottom line as we’ve re-engineered 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 changed processes within our distribution center to reflect safety measures for the staff. These plan changes in the club business led to substantial improvements in operating income.

Meanwhile, our trade, education and international businesses continued strong in both revenues and profitability for the quarter in the nine months year-to-date. In trade, we’re showing continued strength in our ability to publish highly sought-after titles, both in the US 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 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 of Fire novel and Cat Kid Comic Club from Dav 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 in Publishers Weekly, up from 28.8% 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 Zen Shorts by Jon J. Muth, has been launched in 107 countries and was just nominated for an Annie Award. We also had our second ratings hit on the Hallmark Channel with a movie Playing Cupid, based on the book by Jenny Meyerhoff.

In our international segment, we’ve had significant growth in profits throughout the year thanks in part to our successful revenue increases in trade. Similar to the US, fair counts in Canada and the UK declined, but we implemented cost reductions and set the stage for resumption of fairs growth next year. In Australia, where there was a lesser impact on schools from the pandemic, fairs have continued to be strong. In Asia, we are investing in new English language learning products for schools and homes, and continued to expand our franchise schools and direct sales to parents via internet marketers in China. We are also working with a local partner to develop digital content design 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 the classroom magazines, digital subscriptions and teaching resource group beginning June 1, our new fiscal year. Rose Else-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 movement.

The company believes it can benefit by expanding our resources in education to meet the unprecedented amount of federal stimulus funds dedicated to supporting K-12 education over the next two to three years. This federal investment of $180 billion, which is three times the normal investment in one year of federal money going to schools, will be a game-changer for educators and districts, providing them — desperate — providing resources to invest in the teaching and learning solutions that they desperately need to prevent a prolonged learning equity and development crisis for young generation brought on by the challenges of the pandemic. The child care tax credit, investments in family health and support for K-12 school should all work together to improve the lives of children, supported by schools and education.

As districts re-open schools now in early 2021, they are 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’s strength, and we’re 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 PreK 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 LitCamp. We are the ideal partner in this crucial moment because of our deep knowledge of how to engage kids and 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 million cost saving program, target 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. First, rebuilding our fair revenue. Second, expanding the reach of our intellectual property through our trade and international book publishing businesses, and developing more streaming, television and feature film properties. Third, increasing investment in and expanding the reach of our education content, especially digital. Fourth, enabling more parents to acquire children’s books directly via home shipment. Fifth, growing our international English language learning business in Asia. And then supporting these, sixth, continuing to make it easier for our customers to acquire product and information through our digital platforms. And seventh, finally, 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 once 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 re-imagined the way that we get books into the hands of kids. This is a significant achievement, given the drastically changed conditions and on-the-fly adjustments that were necessary during the heart of the pandemic when many supply chains and delivery processes were severely disrupted.

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 worked 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 strengths of Scholastic and providing reading and learning to young people.

We continue to be cautiously optimistic about the fourth quarter, and we are confident that our school-based distribution channels will have a strong longer-term recovery. We remain focused on capturing the significant opportunities ahead, while building momentum in the areas that succeeded during the pandemic, rebuilding also in areas that we’re 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 whatever the circumstances required, thus continuing to define Scholastic’s support for schools and families, and helping children learn and grow.

With that, I will pass the call to Ken Cleary.

Kenneth J. Cleary — Chief Financial Officer

Thank you, Dick, and good afternoon, everyone.

Today, I will refer to our adjusted results for the third quarter excluding one-time items, unless otherwise indicated.

Third quarter revenue was $277.5 million, year-over-year decrease of 26% compared to the last year, due largely to lower sales in book fairs, as Dick mentioned. Operating loss was $11.9 million compared to a loss of $16.8 million last year. Net loss was $4.8 million compared to a loss of $11.9 million last year. Adjusted EBITDA was $14.2 million compared to $5.6 million 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 resulted in an 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 US, 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 UK operations, we sold a now-redundant distribution facility.

We continued 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 million 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. Many of these cost savings were enabled by the technology and related process changes that we have been implementing over the past five years.

Our balance sheet remains solid, supported by our cost management and working capital controls. Net cash from operating activities this quarter was $16.4 million compared to $29.7 million last year, despite the decline in revenue of $95.8 million. Free cash flow for the quarter was $5.5 million compared to $4.9 million last year. Year-to-date, net cash from operating activities was $36.5 million compared to $44 million last year, and free cash flow was $1.5 million this year compared to a use of $25.9 million 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 $162.5 million compared to $247.7 million last year and $161.8 million 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 $78.9 million to $141.3 million, 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, where revenue was driven by a strong frontlist titles such as Cat Kid Comic Club by Dav Pilkey, The Baby-Sitters Club Graphic Novel #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 fairs business and our 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 $2.9 million. Excluding these one-time items, segment operating loss was $3.7 million in the current quarter, down $5.9 million versus last year.

In education, revenue decreased by $8 million to $66.3 million, down 11% in a 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 readers 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 $10.1 million, up by 3% due to operating cost reductions.

In our international segment, revenues were $69.9 million, down $8.9 million from last year due to continued COVID-related disruptions for fairs in Canada and UK, and lower direct sales to Asia. There was a $3.5 million favorable impact from foreign exchange, as the dollar weakened. Operating loss improved to $900,000, a $2.8 million improvement versus last year due to cost reductions and certain COVID-related government wage and rent subsidies in Australia, Canada and 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 and as we continue our intensified marketing efforts, there has been uptick in spring fair bookings. And we’re focused on the customers who are most likely to hold fairs this spring, 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 frontlist from our trade division, with new titles for 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.

Gil Dickoff — Senior Vice President and Treasurer

Thank you, Ken.

As a reminder, we invite questions to be directed via email to investor_relations@scholastic.com. We will respond to your queries within two business days.

And now, I’d like to turn the call back over to Dick Robinson for closing comments.

Richard Robinson — Chairman of the Board, President and Chief Executive Officer

Thank you all for joining the call today. We’re looking forward to this quarter, our final quarter of the year to the fiscal year 2021, and now ahead to FY ’22, as we see 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.

Operator

[Operator Closing Remarks]