Scholastic Q3 2024 Earnings Call Transcript

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March 21, 2024

There are 5 speakers on the call.

Operator

Good day. Thank you for standing by. Welcome to the Scholastic Reports Q3 Fiscal Year 20 24 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeffy Matthews.

Speaker 1

Welcome everyone to Scholastic's fiscal 2024 Third Quarter Earnings Call. Today on the call, I'm joined by Peter Wark, our President and Chief Executive Officer and Hadji Glover, our new Chief Financial Officer and Executive Vice President, who I'm excited to welcome. As usual, we posted the company investor presentation on our IR website at investor. Scholastic.com, which you may download now if you've not already done so. We'd like to point out that certain statements made today will be forward looking.

Speaker 1

These forward looking statements by their nature are subject to various risks and uncertainties and actual results may differ materially from those currently anticipated. In addition, we'll be discussing some non GAAP financial measures as defined in Regulation G. The reconciliation of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and the company's financial tables filed this afternoon on a Form 8 ks. This earnings release has also been posted to our Investor Relations website. I encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC.

Operator

So if

Speaker 1

you have any questions after today's call, please send them directly to our IR email address investorrelationsscholastic.com. Now I'd like to turn the call over to Peter Wirk to begin this afternoon's presentation.

Speaker 2

So thanks, Jeff, and good afternoon, everyone. We appreciate you joining us today. During the Q3, Scholastic executed our long term strategy for growth and impact, while delivering value for our shareholders. In particular, we continue to prove our leadership in children's publishing and media through a consistent and growing presence on bestsellers lists and advanced our 360 degree content creation strategy, including with our recently announced agreement to acquire 100% of the economic interest in 9 Story Media Group, which I'll discuss in a moment. In quarter 3, we also continued execute solidly in school reading events and education solutions, while navigating the currently complex environment in U.

Speaker 2

S. Schools and positioned ourselves for an important quarter 4 season and long term growth. We demonstrated our confidence in the long term outlook for our business with continued share buybacks, returning over $60,000,000 to shareholders during the quarter through a combination of open market share repurchases and our regular dividend. As expected, in quarter 3, Scholastic recorded modest revenue declines and higher losses, largely reflecting external factors and the shifting seasonality of our business. Going into quarter 4, typically our biggest and most profitable quarter, we're confident in achieving our previously provided revised fiscal 2024 guidance for adjusted EBITDA of between $165,000,000 to $175,000,000 with full year revenue approximately level with or slightly below the prior year.

Speaker 2

I'm thrilled to be joined on today's call by our new CFO, Haji Glover, who rejoined Scholastic in January. Haji is a forward looking, growth oriented finance leader who already knows Scholastic well. He's well positioned to drive change and focus our business on the future, using his experience and perspective to build on the work of his predecessor, Ken Cleary, who led the finance organization to dramatically increase efficiencies across our operations. Hadji is another key addition to the Scholastic leadership team, bringing new perspectives, new skills and a shared commitment to helping Scholastic build and execute our plans for long term growth and value creation. As announced this morning, we've appointed 2 new directors to our Board, Kaja Henderson and Alex Guerreire.

Speaker 2

They are both accomplished leaders in K-twelve education and education technology with extensive experience serving kids, families and schools as well as expertise driving excellence in complex organizations. Kaia's career spans over 3 decades of work in schools, policy and the not for profit sector, earning her a reputation as one of the most admired school leaders in America. Alex contributes over 20 years of experience in the education sector, including as a teacher and successful EdTech entrepreneur. They're joining the company as an exciting moment when their skills, experience and market knowledge are especially relevant to us and we're very happy to welcome them. Turning now to the highlights across our business segments.

Speaker 2

In the Children's Book Publishing and Distribution segment, revenues declined 5% as last quarter reflected the planned resizing of book clubs as well as lower expected production revenue from Scholastic Entertainment. Scholastic's trade publishing continued to outperform with consolidated trait sales up 15%, excluding Scholastic Entertainment. This strong performance contrast positively with the juvenile and young adult retail book selling market, which was down a slight 1% during the quarter as overall sales levels continue to revert to pre pandemic growth trends. Scholastic's exceptional showing in retail was driven by a strong performance over the holiday season and multiple new releases, including Heroes by Alan Gratz and the latest titles in our popular graphic novel series, Heartstopper, Wings of Fire, Amulet and The Babysitter's Club. Scholastic's new front list titles top bestseller lists and we continue to expand our market share of middle grade graphic novels.

Speaker 2

At one point last quarter in fact, Scholastic titles filled every spot on BookScan's top 20 list of best selling juvenile graphic novels. In 2024, we've increased our already dominant presence on the New York Times middle grade and graphic books and manga bestseller lists compared to the same period last year. This includes Wave Rider, the long awaited finale in the Amulet series, which landed at number 1 on the New York Times graphic novel bestseller list and was the number 1 juvenile title the week of on sale with over 30,000 copies sold. We're also excited about multiple upcoming releases, which we expect to drive further momentum in our children's publishing and spotlight our incredible authors. This includes 2 more releases calendar year in Dave Pilkey's Dog Man series, including Dog Man: The Scarlet Shudder, which went on sale earlier this week.

Speaker 2

In August, we released Unico, a new kid friendly manga series, which is already generating a lot of buzz. Highlights of our fall calendar include the illustrated edition of Suzanne Collins worldwide bestseller, The Hunger Games, a new illustrated Christmas at Hogwarts and the latest novel from best selling and award winning author, Alice Hoffman, When We Flew Away, a novel of Anne Frank before the diary. In Scholastic Entertainment, revenues were down in quarter 3 relative to the prior year period when we recorded revenue for delivery of episodes of EVA the outlet. However, building for the future, we continue to execute on our 360 degree strategy, bringing Scholastic brands and franchises to the screen. Disney announced another season of the live action Goosebumps TV series on Disney plus after a highly successful first season this past fall.

Speaker 2

We expect the 2nd season to drive significant incremental exposure and upside for our global best selling book series and brand. As the President of Disney Branded Television has said, Audiences everywhere fell in love with goosebumps, chills, thrills, heart and humor, making it one of Disney branded television's most watched shows of last year. In addition to the Goosebumps franchise, we continue to partner with top tier platforms, producers, screenwriters and actors to meet strong demand for nostalgia. As I've discussed on previous calls, we have multiple exciting projects in our pipeline building on best selling Scholastic franchises like Magic School Bluffs, 39 Clues, Animorphs, Fly Guy and more as we continue to create new media moments to complete the virtuous circle of children's brands on page and screen. Turning to our School Reading Events division, the fiscal 1st and third quarters are typically a quieter time given the timing of school holidays.

Speaker 2

In book fairs, sales declined slightly in quarter 3. Revenue per fair or RPF remains close to record levels. However, this school year, we have seen RPF decline slightly. This largely reflects the addition of smaller fares to the full schedule as we increase fare count, as well as headwinds in the school environment, including high rates of absenteeism, which impacts student participation and teacher shortages. That said, fare count remains strong and on track to meet our goal of returning to 90% of pre pandemic levels while strengthening the profitability of our fares.

Speaker 2

Thanks to our customer centric approach from improved tools for book fair hosts and new payment options for kids and families to kid favorite merchandising and assortments, we continue to deliver the unique joyful celebration of reading that only Scholastic Book Fairs can provide. As a result, we remain optimistic about a strong spring season. Last quarter, we also further refined our plan to strategically resize book clubs to a more profitable core as part of our plan to achieve long term profit growth in school reading events over time. We're already seeing cost savings as a result. That said, lower teacher participation in spending from earlier this school year is carrying over into Club's spring results as expected.

Speaker 2

Moving to Education Solutions. Quarter 3 sales were down very modestly as we operationalize our growth strategy and realign key product lines in the market to deliver blended literacy focused solutions. We see significant opportunities ahead and are advancing plans to reinvent our Classroom Magazines business to combine digital content and instruction. As we work to broaden and deepen our print and digital offerings, we're focused on meeting the needs of educators, the increasing need for literacy products and schools and districts' ability to tap multiple funding streams, including federal ESSA funding, which school districts must commit to use by September 2024. Turning to our International segment.

Speaker 2

Revenues and profits were up strongly as a result of the ongoing recovery in book sales, particularly in Canada, the UK and Asia. Our international team is focused on helping to drive the recovery in target markets and ensuring our titles are optimally positioned while further driving efficiencies and leveraging corporate resources as appropriate. Since its 2017 reboot, Scholastic Entertainment has proven that there's significant demand for Scholastic's brand and publishing IP on screens as well as the page and that we can effectively and profitably meet this demand. Further, as it opens more channels and opportunities to reach kids where they are, we've seen this strategy boost book sales and increase the value of our IP and brand. This is the virtuous circle that I've spoken about.

Speaker 2

Last week's announcement to invest in 9 Story Media Group was a timely opportunity to cement our relationship with a long time mission aligned partner and team. 9 Story is an industry leading creator, producer and distributor of premium animated and live action children's content. Scholastic has been working with the company and its founder for over 20 years. By acquiring 100 percent of the economic interest and a minority of voting rights in 9 Story Media Group, we achieved two things. First, we'll significantly expand the scope and scale of our media business, adding 9 and licensing revenue and profit lines to Scholastic.

Speaker 2

2nd, through greater strategic coordination and integration, we'll substantially increase our ability and speed in building and monetizing Scholastic's global multimedia children's brands, which underpin and will broaden our 360 degree content creation strategy. These two rationales are complementary and additive, which is why we're so excited about this transformative opportunity for Scholastic. With 9 Story, in addition to the talent of their team and their exciting pipeline, we're acquiring turnkey global production studios in Toronto, Dublin and Bali with state of the art animation and live action production capabilities. The quality of their work speaks for Excel with 21 Emmy Award Wins. 9 Story controls an extensive content library distributing over 5,000 half hour episodes of 2 d and 3 d animation together with a live action catalog as well as over 10,000 half hour programs distributed across major advertising video on demand or AVOD platforms.

Speaker 2

9 Story also has the ability to tap into significant Canadian and Irish tax subsidies and to pre sell and monetize productions through their global sales, distribution and licensing teams. This substantially de risks new projects and improves the long term economics of media franchises far beyond what's possible under our current arm's length relationship. As I previously mentioned, we believe this investment to acquire 100 percent of the economic interest in 9Story will significantly deepen our capabilities across the entire IP lifecycle, in turn, bolstering our 360 degree content creation strategy. Scholastic and 9 Stories share the same mission, to engage children and families with inspiring stories and content. In today's world, it's important that we meet kids where they are and bring them back to reading.

Speaker 2

We see tremendous opportunity to leverage the deeper capabilities we gain from the deal to support the growth of Scholastic's children's franchises, drive book sales, create additional opportunity for Scholastic authors and partners and introduce millions of new kids and families to Scholastic Books and Stories. We'll also expand long term monetization opportunities as we bring 9 Stories in house distribution merchandising and licensing teams and global sales network onto the Scholastic platform. So to sum up, we believe this deal is both additive and synergistic. It adds 9 Stories industry leading capabilities and revenue streams, their compelling economic model and a highly talented team. Leveraging Scholastic's trusted brand and proven ability to create iconic children's series and franchises, the new capabilities will allow us to build deeper connections with young people through our stories as the pages of our books come to life on screens and through merchandising.

Speaker 2

In short, this opportunity positions Scholastic to meet the continued strong demand for high quality kids and family entertainment, expanding the footprint of Scholastic to authors and illustrators, building global franchises on every platform, and of course, creating more value for our shareholders. We look forward to sharing more once the deal is closed. And with that, I'll now hand the call over to Hadji.

Speaker 3

Thank you, Peter, and good afternoon, everyone. Before I turn to our financial results, I would like to say how happy I am to be back at Scholastic, a company whose mission and people are very dear to me. As the new CFO, I have the privilege and the opportunity to lead a strong mission driven financial organization at Scholastic at a very exciting moment in the company's history. The work that Ken and the finance team achieved to drive efficiencies over the past few years has created a solid foundation that we can now use have made over the past 1.5 years, allocating capital against our priorities, which include investing in growth opportunities, maintaining a strong and efficient balance sheet and returning excess cash to the shareholders to enhance their returns. Our recent agreement to invest in 9 Story and the over $60,000,000 we returned to shareholders last quarter both speak to that progress.

Speaker 3

I look forward to supporting Peter, my talented colleagues and the Board and continuing to rigorously allocate capital to support Scholastic's long term growth. With that, I will now walk through our consolidated financial results. I will refer to our adjusted results for the Q3, excluding one time items, unless otherwise indicated. In fiscal 2023, the company did not report one time items. Please refer to our press release tables and SEC filings for a complete disclosure of one time items.

Speaker 3

As Peter described, in our seasonally smaller third quarter, revenues were $323,700,000 just slightly below the prior year period. Adjusted operating loss in the quarter grew to $30,600,000 as expected, reflecting increasingly seasonality and spending in preparation for our anticipated significant Q4 compared to $27,700,000 a year ago. Adjusted EBITDA was a loss of $7,200,000 from $5,400,000 a year ago, in line with adjusted operating income. Adjusted net loss, excluding one time items, was $23,300,000 compared to $19,200,000 in the prior year period. Adjusted loss per diluted share was $0.80 compared to $0.57 in fiscal 2023.

Speaker 3

Turning to our segment results. In children's book publishing and distribution, revenues for the 3rd quarter decreased 5% to $193,600,000 primarily driven by strategic resizing of book clubs. Adjusted segment operating income was $2,700,000 up from $1,900,000 in the prior year period, reflecting improved efficiencies on modestly lower revenues. Within the segment, consolidated trade revenues were $77,600,000 in the quarter, compared to the prior period revenues of $72,800,000 driven by strong front list sales and multiple best sellers in the quarter. This was partially offset by lower timing related revenues in Scholastic Entertainment relative to the prior year when the company completed the delivery of episodes of the animated series EVA the Owlette based on Scholastic's Owl Diary series.

Speaker 3

Bookfair revenues decreased 1% to $102,700,000 in the quarter, driven by slightly lower average revenue per fare, partly offset by higher fare count. Fare count remains on track to reach nearly 90% of pre pandemic levels this year, up from 85% in fiscal 2023. Book Club revenues of $13,300,000 were down versus prior year period revenues of 27,700,000 dollars As the company has previously discussed, we eliminated unprofitable offerings during the back to school season as part of our strategy to shrink this business to a more profitable core. These actions impacted 3rd quarter revenues as expected and will continue to have an impact for the remainder of the school year. Turning to the Education Solutions segment.

Speaker 3

Revenues were down 2% to $68,500,000 in the 3rd quarter, reflecting lower sales of supplemental and structural materials, partially offset by higher state sponsor program revenues. Segment operating loss was $800,000 compared to profit of $700,000 in the prior period, largely reflecting lower revenues and continued investments to realign key product lines to deliver blended literacy focused solutions. International segment revenues increased 16% to $59,100,000 in the quarter, reflecting continued recovery in our major markets, particularly in Canada, in the UK, as well as in Asia. The net foreign exchange impact was negligible in the quarter. Segment operating loss improved to $5,900,000 compared to a loss of $9,000,000 a year ago, primarily driven by improved results in Canada, which benefited from the reorganization of book clubs in the Q1.

Speaker 3

Adjusted unallocated overhead costs of $26,600,000 increased from $21,300,000 in the prior period, primarily reflecting favorable litigation settlements in the prior year. This was partially offset by higher rental revenue recorded in corporate overhead in the current period. As a reminder, this was previously recorded as a benefit in SG and A in the prior year period. On approximately 27,000 square feet lease as of today, we expect annualized straight line rental revenue to total approximately 9,900,000 in the fiscal 2024. Now turning to cash flow and the balance sheet.

Speaker 3

Net cash provided by operating activities was 13,100,000 dollars in the current quarter compared to $7,600,000 in the prior period. Lower inventory spend in the quarter driven by lower freight and manufacturing costs compared to a year ago improved working capital. We continue to manage inventory purchases substantially closer to our demand, resulting in sufficient inventory on hand and lower spend. Free cash flow use in the 3rd quarter was $7,100,000 compared to $11,900,000 in the prior year period, reflecting lower working capital, partially offset by one time severance costs. At the end of the quarter, cash and cash equivalents, net of total debt, was $78,900,000 compared to $218,500,000 at the end of the fiscal 2023.

Speaker 3

In addition to investments in content and capabilities to drive growth, we continue to return capital to shareholders in the 3rd quarter through our regular dividend and open market share repurchases. We repurchased 1,400,000 shares in the 3rd quarter for $54,200,000 Together with our regular dividend, we returned over $60,000,000 in the 3rd quarter and $161,000,000 so far this fiscal year. In fiscal 2024 thus far, we have repurchased 3,600,000 shares, which net of 523,000 shares issued related to stock compensation represents 11% of the company's shares outstanding. The company's shares outstanding are now below $28,000,000 We do not anticipate our share repurchase program or regular dividend to be impacted by the investment in 9 Story, which we intend to initially fund from our available cash and revolving credit facility. Based on year to date results, we now are forecasting full year free cash flow of $55,000,000 to $65,000,000 Given strong working capital management in the 3rd quarter, total CapEx and pre publication spending for the full year is still forecast to be $100,000,000 to 110,000,000 dollars Turning to the financial details of our investment in 9 Story.

Speaker 3

Upon closing the transaction, 9 Story will contribute significantly to Scholastic's financial results and be fully consolidated with Scholastic Entertainment in a new reporting segment. 9 Story recorded revenue of approximately US104 $1,000,000 in its most recent fiscal year ended August 31, 2023. 9 Story is comprised of 4 business units that provide capabilities across the entire IP lifecycle, with majority of its revenue currently coming from its production work, both the creative service production work it does for other IP owners, including Scholastic, and productions for IP that it controls. On the basis of its compelling stand alone business model, we expect 9Story to contribute top and bottom line growth through its existing content library, best in class production studios and global distribution and licensing capabilities. Adding in the synergy potential with Scholastic's own IP and development work, we expect the deal to reduce the capital intensity of Scholastic's own productions, allowing us to expand development of Scholastic IP and to drive long term earning accretion.

Speaker 3

As Peter noted earlier, we acquired 100% economic interest with minority voting rights in 9Story for approximately US186 $1,000,000 This is a common deal structure in the Canadian media industry to ensure that 9Story remains Canadian controlled and as such remains eligible for production tax credits there. Subject to approval by the Minister of Canadian Heritage, which is a condition of closing the transaction. Typical of these deals, voting control lies in different class of shares, the majority of which will be held by the current Canadian management of 9 Storey. Scholastic will have rights to approve certain key decisions related to the company's business affairs and overall strategy, including changing the nature of the company's business, the setting of annual budgets and major investment in transactions. 9 Storey also has access to tax credits in Ireland for productions that are based there.

Speaker 3

As Peter mentioned, 9 Storey's access to tax subsidies is a key advantage enabling the company to achieve significantly higher margins on production, which otherwise Scholastic could not achieve. In addition to favorable margins, 9 Story's ability to pre sell productions through their global sales and distribution team also derisk project financing, which should enable Scholastic to pursue more production of its IP. I'll also like to reemphasize how this investment in addition to our actions to return capital to shareholders aligns with our capital allocation strategy, which prioritize growth investments as I outlined earlier. We expect to initially fund the investment from our available cash and revolving credit facility. We are also maintaining our current dividend and have re upped our share repurchase program as I just described.

Speaker 3

This deal is expected to close in Scholastic's fiscal 2025 Q1, which begins June 1, 2024. Turning to our outlook. As Peter noted, we are affirming our previously revised guidance for the fiscal year. As we head into our 4th quarter, which is typically our most profitable, we continue to target adjusted EBITDA of $165,000,000 to $175,000,000 This excludes the impact of one time charges of $10,600,000 related to restructuring and acquisition activity incurred so far this year. We continue to expect full year revenue to be approximately level with or slightly below the prior year.

Speaker 3

Thank you for your time today, and I will now hand the call back to Peter for his final remarks.

Speaker 2

Thank you, Hadji. As you've heard on the call today, there's an enormous amount of activity underway across the business. We're driving momentum behind the trusted Scholastic brand and our children's publishing and media franchises, helping to reach more kids and families with high quality engaging content that inspires learning on the page and screen and driving long term growth and shareholder value creation. I'm excited about the potential of our strategy and the strength of execution underway across the businesses to reach our goal for long term growth. Let me now turn the call over to Jeff.

Speaker 1

Thank you, Peter. We appreciate our investors' time today and continuing support. With that, we will open the call for questions.

Operator

Thank you. Our first question comes from the line of Brendan McCarthy with Sidoti. You may proceed.

Speaker 4

Hey, good afternoon everybody. Thanks for taking my questions. Just wanted to start off in the consolidated trade area, it looks like sales were up 7%, solid growth there. Can you talk about the front list and back list and which contributed more to that growth?

Speaker 2

We were particularly it's Peter here. We were particularly pleased with the performance over the holiday season. And on top of that, we did particularly well with a number of front list titles, particularly new graphics, novels, which is a category that we are very much the market leader. So it was really a question of the titles and authors, which we have published on a regular basis over a number of years, but also some good new titles as well. So it was really a combination of it was both new and continuity in that respect.

Speaker 4

Understood. Got it. And then looking quickly at gross margins, they were up nicely year over year. How do you expect that trend to continue looking out the next couple of fiscal quarters?

Speaker 3

Hey Brandon, this is Haji. Thanks for the question. So as we're looking right now with the cost of freight in our COGS line, you can see that we have a strong improvement year to date, roughly about $20,000,000 year to date that we have saved in both our COGS and our inventory. It's really driven around our utilization. We're basically back in line to pre pandemic levels when it comes to our inventory levels, which is really driving the profitability in our gross margin section.

Speaker 4

Got it. Thanks. That's helpful. Turning to the book clubs business, another pretty large revenue decline there. But can you offer some insight into the timing of the shrink to grow strategy there?

Speaker 4

Maybe over the next couple of quarters, when do you expect the revenue variation to kind of

Speaker 2

normalize? Well, it's a medium to longer term project, Brendan, in terms of what we're doing. What we're seeking to do is to have a smaller but more profitable business. And I would expect that it's going to take some quarters before we get to the destination that we might ultimately want to be to. But I'm reasonably confident that there is going to be improvement quarter over quarter in terms of performance.

Speaker 2

And what we're doing at the moment is very much working right now on testing some new strategies for next year that we hope will contribute very much to our medium to long term plan.

Speaker 4

Got it. Got it. Thanks, Peter. Maybe one more question for me, just looking at the 9 story investment. I know you mentioned probably lower capital intensity business that are looking out in the future as well as certain tax advantages.

Speaker 4

But do you expect to see any integration costs or elevated costs from this investment over the next couple of quarters?

Speaker 3

We don't expect to see a large number of integration costs. If anything, we're looking to continue to let 9 Stories work as they are and find opportunities to bolt on things within that business. But right now, it's very efficient and we could continue to see that there's potential opportunity for some synergies in the future.

Speaker 4

Understood. Ajay and Peter, thank you very much for the answers. I appreciate it. That's all for

Speaker 3

me. Thank you, Brandon.

Operator

Thank you. And this concludes our Q and A. I will pass the call back to management for any closing remarks.

Speaker 2

Well, thank you, operator, and thank you to all of those who joined us this afternoon. I wish you all a happy spring. We look forward to engaging with our investors in the coming days and to providing a further update on our progress, including our investment in 9 Storey and on our plan for fiscal 2025 in July on our year end call. Thanks again. Goodbye.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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