Q3 2019 Earnings Call
Ladies and gentlemen, thank you for Standalone bar and welcome to the Hope Mifflin Harcourt's third quarter earnings Conference call.
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After the speaker presentations, there will be a question and answer session.
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Next I hand, the conference over to your Speaker today Lawrence Sugarman. Thank you. Please go ahead Sir.
Thank you and good morning, everyone before we begin I would like to point out that the slides referred to on today's call can be found on the Investor Relations section of our web site at HMH CEO Dot com.
A replay of today's call will be available until November 10, 2019, and a webcast will be available on our website for one year.
Our 10-Q was also filed earlier this morning, along with our third quarter 2019 earnings press release.
Before we discuss our results I encourage you to review the cautionary statement on slide two for our customary disclosures.
Further information can be found in our regular FCC filings.
In addition, please refer to the appendix NR slide presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, which is also posted to the HMH Investor Relations website.
This morning, Jack Lynch, HMH, as President and Chief Executive Officer, and Joe Rabbit, H. matrices, Chief Financial Officer will provide a company update as well as an overview of the company's third quarter 2019 results.
After our prepared remarks, we will open the call to questions.
During Q M&A. Please limit yourself to one question plus one follow up you may get back into the queue. If you have additional questions.
Now I'll turn the call over to Jack.
Thank you Brian good morning, everyone.
Today, Joe and I will overview, our third quarter 2019 results.
Which we previewed at our Investor update on October 17.
In short HMH achieved record billings growth for the third quarter and year to date.
31% growth in billings companywide for the quarter and 26% year to date.
Our billings guidance was raised for the second time this year at our Investor update.
To reiterate that guidance for 2019, we expect to generate billings of $1.59 billion to $1.62 billion.
By business, we expect core solutions billings growth of 40% to 50% and extensions billings growth in the low teens.
For HMH books media, we expect to be down high single digits for the year.
And we expect to generate 102 120 million a free cash flow for 2019.
We will apply have free cash flow to improve our balance sheet.
Paying down our debt and giving us the strategic flexibility to invest for higher growth.
Okay. That's in summary for the quarter guidance for the year.
Now our segment specific results.
First within our education segment core solution billings were up 50% to 412 million in Q3.
And up 48% to 705 million year to date.
This increase was driven by the continued performance of our into programs, both in Texas and nationwide.
An extension billings were up 25% to $287 million in Q3.
And 14% to 559 million year to date driven in large part by continued double digit growth at high demand as well as strong performance from our service offerings.
That's the education segment.
HMH books in media billings decreased 29% to 48 million in Q3 with a decline of 10% to 127 million on a year to date basis, we had a difficult comparison due to onetime benefits of $16 million in Orwell licensing income in the third.
Quarter of 2018, as we stated last quarter.
Still we expect growth in the low single digits for HMH books, and media long term and the fundamentals of the business remains solid with a focus on brand building and award winning multimedia content.
Just this quarter for example, good nice little Blue truck debuted at number one on the New York Times Children's picture books bestseller list.
Now before I hand, the call over to Joe I'd like to quickly touch on the key points of our strategy that are shared with you at our investor update two weeks ago.
First you heard that we continue to make great progress on enhancing and extending the core.
Our next generation products, we leased to the market. This year have a leading share in all of the adoptions, taking place in 2019, including a 56% share in the Texas CLA adoption.
We also drove very strong growth in our extensions business, where we expect to see billings growth low teens in 2019.
Second we shared with you our vision for delivering integrated solutions for our customers and how that opportunity can drive further growth or extensions portfolio as a cross sell from core to extensions of the core to the same customer base and capture a greater share of the $276.
Spend per student.
Finally operational excellence.
Two weeks ago, we shared in several actions we've taken to accelerate our strategy.
Including an 8% workforce reduction net additions and the implementation of a software like development model.
Which will result in a 20% decrease in plant content development spend each year going forward.
We believe that the combination of these actions will make HMH, a faster growing more profitable company now and into the future for the benefit of our customers students and shareholders.
Now Joe will take you through the Q3 and year to date financial highlights.
Thanks, Jack and good morning, everyone.
In the third quarter, we delivered positive free cash flow of $358 million consistent with our seasonal pattern of free cash flow.
And as we enter our fourth quarter, our second largest cash collection quarter historically.
We are reaffirming the guidance, we established at our Investor update, which is $100 million to $120 million and free cash flow for the full year 2019.
A leading indicator of free cash flow growth is our accounts receivable balance, which at the end of the third quarter was nearly $82 million higher than at the same point last year.
We generated approximately $35 million of free cash flow in Q4, 2018, and we expect collection of our higher receivable balance net of cash cash expenditures to result in Q4, 2019 free cash flow of $82 million to $102 million, which brings us to our guidance of 100 to one.
Third and $20 million for the full year.
As we've said we plan to apply that free cash flow to improve our balance sheet paying down our debt and giving us the strategic flicks flexibility to invest for higher growth.
Now moving onto the financial highlights of the third quarter.
Our consolidated net sales grew 10% to $566 million into third quarter and grew 7% to 1.149 billion for the first nine months of 2019.
Total company billings grew 31% to $747 million in the third quarter, reflecting strong growth of our education segment, and partially offset by a decline in our HMH books and media segment.
Education billings were up 39% to $699 million in the third quarter, driven by core solutions billings growth of 50% and extensions billing growth.
25%.
HMH books, and media segment billings decreased 29% to $48 million for the quarter.
Year to date billings grew 26% to $1.39 billion with education segment billings growing 31% driven by core solutions billings of 48% and extensions billings growth of 14%.
Got you made books and media segment billings decreased 10% in the first nine months.
Income from continuing operations for the third quarter was $69 million and unfavorable change of $15 million compared to Q3 2018.
This is related to our incurrence of cost of sales and selling and administrative expenses associated with the heavy billings volume in the third quarter.
Adjusted EBITDA for the third quarter declined $11 million to $149 million in declined to $20 million to $169 million on a year to date basis due to the same factors impacting net income.
Our free cash flow year to date was $18 million compared to a usage of $108 million during the same period of last year.
Consistent with our historical seasonal patterns, the third quarter was our largest free cash flow quarter of the year.
As I mentioned earlier, we expect Q4 to be another strong positive free cash flow quarter, putting us on track to achieve our guidance of $100 million to $120 million and free cash flow for the full year.
Content development spending was $82 million in the first nine months of 2019 compared to $92 million for the same period last year total capital expenditures inclusive of content development spend were $109 billion for the first nine months of 2019 compared to $134 million for the same period last year.
As Jack mentioned, given the strong performance HMH has had this year. We are today reiterating our updated guidance for 2019, which we raised for the second time this year at our October 17th Investor update.
For the full year, we now expect companywide billings to be between $1.59 billion to $1.62 billion, which we've raised twice since we issued our original guidance in February our outlook for content development spend and total capital expenditures is now at the bottom half of our original guidance ranges for these metrics.
We expect extensions to grow in the low teens, and HMH books and media to decline in the high single digits, all other assumptions underlying our guidance remains unchanged.
This strong guidance for the year reflects our continued confidence in the progress we have made and we'll continue to make on our strategy to transform HMH.
Our focus is on creating extraordinary value for our customers while simultaneously reducing costs.
This value innovation approach is driving our free cash flow growth.
By delivering solutions that are customers need the most.
And eliminating and reducing the aspects of our legacy business model that are no longer valued.
To that end.
As you know we took significant actions to creates stickiness in our business and commit to a continuous development model, while reducing costs.
We announced an 8% position reduction at our Investor update on October 17th as well as a 20% reduction in previously planned content development spend over the next three years.
While our shift from episodic to continuous development enables greater leverage of our content development spend it also tightens the linkage between HMH or customers through constant feedback consideration increasing the value we deliver over time.
And we expect increased value delivered to be rewarded with deeper stickier customer relationships and a higher share of our customers instructional materials investment.
To help our investors model the impacts of the significant improvements we have made.
On October 17th we provided a near term outlook for the key financial metrics that drive free cash flow.
With a dramatically improved free cash flow engine.
We are excited by our enhanced opportunities to capitalize on the healthy elevated levels of new adoption spending ahead in the next three years in market sizes that we consider to be mid cycle.
To reiterate our expectations, we expect that the next three years 2020 through 2022.
Will yield financial results in the range is shown under the mid cycle column.
The trough in peak columns filling the picture with a pro forma view of how our strategy has improved free cash flow at all points in the new adoption cycle.
This is a baseline and we expect that baseline to improve as we continue to execute our value innovation approach.
By the time, we reached the next trough or peak, we anticipate substantially better free cash flow and free cash flow margins that are shown here.
With that I'll now turn the call back to Jack.
Thank you Joe before we take your questions I'd like to summarize the points from this morning.
Our continued execution of our strategy drove strong billings growth in free cash flow in Q3 and year to date.
We are reaffirming the billings guidance, we shared with the two weeks ago 1.59 to 1.62 billion for 2019, including the expectation of 102 120 million in free cash flow for the year, we'd that free cash flow. Our first priority is to pay down our debt.
And strengthen our balance sheet to increase our strategic flexibility to invest for higher growth.
By executing on our strategy, we're transforming HMH and creating a more profitable company with lower free cash flow variability in an improved balance sheet.
Double bottom line business, producing more impact for students and greater returns for our shareholders.
Okay before going to questions I'd like to turn it back to Joe for an update about our refinancing plans Joe.
Thanks Jack.
Our Investor meeting on October 17th we told you that we intended to be proactive about refinancing our existing term loan.
We now expect to launch a refinancing transaction with a limited call to be scheduled in the next couple of days.
Additional details for potential lenders will be forthcoming from the banks arranging our refinancing.
Naturally completion of a refinancing in the near term will be subject to market in other customary conditions.
We will now open up the line to take your questions operator.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound.
Please standby welded compiled the today roster.
I show our first question comes from Jeff Goldstein from Morgan Stanley . Please go ahead.
Hey, guys good morning.
New long term free cash flow guidance that you've now have out there maybe you could just expand on internally what you did to derive those figures and so really what gives you confidence that post the recently announced cost restructuring you'll be able to hit those targets that you've now laid out.
Hey, Jeff Thats Joe.
Well the way we have compile those really is by looking at the resulting.
Reductions that we've made to the cost structure net of the investments that we've made.
That is represented in the eight present net position reduction that we talked about on the investor call earlier this morning.
Well as the planned reduction in our content development spend which gets you to the product development spend number. So those are the figures we've taken the actions.
On the position elimination that we've already discussed that's already occurred and and so thats why we feel very good very confident about the forecasted in the in the guidance that we put out there in the mid cycle column over the next three years.
Okay. That's helpful. And then we use the here in the past about the potential threat to your business from more open source the offering.
The update us on if you see any pressure from that or is it still just mostly the larger players where the I guess competitive threat. So just any thoughts on the overall competitive environment would be helpful.
Yep.
Yes, I think the way to think about open source relative to.
Our existing competition is that open source is typically used to augment.
Programs like ours, unlike our competitors in the classroom.
We rarely see open source being used as a replacement so within core curriculum.
There is three major players in Cork in that core curriculum category. There is a number of other smaller players in that category and let the three the three companies, including ourselves make up a majority of that particular category.
All right. Thanks.
Thank you. Our next question comes from Bill Warmington from Wells Fargo. Please go ahead.
Good morning, everyone.
Just wanted to ask a question about the extensions business and the double digit growth there.
If you could talk a little bit about what's actually driving that organic growth in extensions and whether M&A is an option to supplement that growth going forward and how comfortable do you feel with double digit as double digit growth and extensions as a target over the next two to three years.
Yes build great question, we've guided long term low to mid single digit growth for extensions and for the last two years Youve outperformed that guidance.
We would expect long term debt, we would have low to mid single digit growth in extensions and.
And from our standpoint, the growth that you saw this year is largely as a result of heinemann in particular, there their new program found to sell classroom, which has performed incredibly well.
Not only in Texas as a supplement in the adoption, but also nationwide in terms of M&A and how do we capture a larger share of that $6 billion. It is a highly fragmented.
Category.
Extensions and we do believe said, we'll be able to grow our share of it organically, but we have not ruled out and in inorganic growth and we certainly see M&A as an opportunity to expand our share of.
What we see as a very exciting.
Faster growing and more profitable category.
Then as a follow up question I wanted to ask about what your thoughts were on debt outstanding.
And total leverage.
By the end of December .
Well below its Joe based on where we are in the process right now.
Be inappropriate for us to provide additional detail at this point in time will provide you more updates we get towards the end of our refinancing process, but as we've said our intention with the free cash flow generation.
Is to continue to use that to reduce the gross debt level overtime and that is unchanged.
Well thank you.
Thank you.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question first Apache.
Our next question comes from George Tong from Goldman Sachs. Please go ahead.
Hi, Good morning. This is Blake on for George Thanks for taking my question.
You mentioned that you you are planning on reducing variable costs and fixed costs through.
Ongoing connection to the teacher and standardized station.
You material.
Can you go into some specific details about.
Initiatives, there and how you plan to bring those costs down.
Yes, what we're referring to there specifically is customer acquisition costs on the variable cost side, the more stickiness in the relationships that we create with our customers more of an opportunity for renewals as opposed to.
Really going out and needing to.
Acquire new customers at every new sales opportunity.
Fixed cost base, so thats really what that is referring to in those two areas and it goes along with the the value innovation approach that we discussed at length in our Investor update on October 17.
Great appreciate that.
And then just regarding the extensions business you mentioned that extensions growth was partially driven by strong cross selling activity.
Can you quantify how much of the growth. It was result of cross selling.
And.
What youre specific initiatives are there as well.
Yes, we havent, we haven't disclosed what percentage of our revenues.
Our generated through cross selling I think it is something that in the future.
We will take a look at because we are very focused obviously on cross selling from the core to extensions and capturing a larger share of that $276 spend.
So right now we haven't we havent disclosed what percent is through cross selling but clearly our aim is to focus on the cross selling activity.
Great Thats helpful. Thank you.
Thank you.
That concludes our today's session at this time I would like to turn the call over to Jack Lynch, President and CEO for closing remarks. Please go ahead Sir.
Thank you everyone for your time today, we look forward to speaking with you again at our Q4 call in February Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect good day.