Q2 2020 Earnings Call
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Pick off senior Vice President and Treasurer head of Investor Relations. Please go ahead Sir.
Thank you Joe Allen Good afternoon, everyone welcome to Scholastic second quarter 2020 earnings call with me here today are <expletive> Robinson, our chairman President and Chief Executive Officer, and can clearly the company's Chief Financial Officer, We've posted an investor presentation on our IR web site at Investor Dot Scholastic Todd.
On which we encourage you to download if you if not already done so.
That's right to point out that certain statements made today will be forward looking because 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 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 entry view the risk factors contained in our annual and quarterly reports filed with the FCC and now I would like to turn the call over to dig Robinson.
Good afternoon, everyone. Thank you for joining our call during this busy holiday season.
Following our second quarter results were in good position to realize our fiscal goals as or high quality children's content is selling well I don't know investments and technologies inefficiencies are showing benefits book fairs performed strongly in the quarter would rather you fear and profitability both increasing rebound from.
Difficult finish school year.
Children's books remained strong for the publishing industry overall with some growth in the category offsetting a decline in adult books.
Based on 2018 revenues scholastic remained on the top talent Global book Publishers as recently reported book Publishers Weekly.
Uniquely we're the only publisher in this influential group solely focused on children's books and education sales in the K 12 market.
The demand for children's content goes beyond publishing and is actively sought in TV in films as well.
The new Clifford the Big Red Dog animated series had its larger than life debut on Amazon Prime video and PBS Kids earlier, this month and bodes continues to grow.
Internationally this appetite for engaging content also extends to English language learning materials.
We are expanding or is it the central connection to schools and families globally, while utilizing technology advancements to improve operating income.
Without second quarter revenue was 597.2 million decreased a 1% compared to 604.7 billion in the second quarter 29 team.
Operating income in the second quarter was 105.1 billion of 7% increase compared to 98.2 billion one year ago.
We are affirming our outlook for revenues for the 2020 fiscal year in the range to 1.67 to 1.7 billion and in a few minutes couldn't cleary will detail or quarterly operating results iOS and adjusted EBITDA, but first I'd like to share some highlights and updates with you.
[noise] or trade businesses, having exceptional year over year growth at 8% in revenues, even when compared to prior year results, which included the release of JK Rollings fantastic beasts. The crime. Some brindle world. We've seen headlines this fall around the power of graphic novels with her own authors state gilkey.
Rayna Togo Meyer at the forefront.
When featuring her news release God.
The New York Times said as follows ranges intimate accessible style and stories about young characters facing everyday struggles with schools family drama friendships and bullies seem to speak directly to kids.
We were seeing through event and reader response with this graphic novel.
Struck on them on mistaken cord within a generation twin girls that is rarely seen and is this your comes to close ranges Guts has appeared on 11 best to best of 2019 list to date.
Other best Sellers include two east Sutherland's wings were fired the baby Sitters club graphic novels, the Dinky Donkey Alan grandsons alloys, Maggie defaulters cold down the hall, which launches a new trilogy, and Harry Potter and the goblet, who fire the illustrated edition.
[noise] Dog man, such 20 to realize released earlier this month.
As the number one both top selling.
U.S. book across all categories.
And looking forward, we eagerly await the Belgium songbirds snakes, the new hunger games novel basins and Collins coming in May.
To ensure that every child has an opportunity to access these engaged characters and stories or distribution channels had never been more important.
It was as we previously mentioned on calls we've been implementing cost saving strategies and both are fares and clubs businesses with benefits seen in this past quarter.
Like briefly noted earlier in addition to trade success book fairs had a very strong full performance or clear focus on fear quality, including breadth and depth the product and utilization of technology advance enhancements such as you always an access to increase data that's strengthened our ability to bring the right fair to cost.
Rooms at the right time generating greater revenue and profitability per affair. In fact, the last four months have been among the best in the last 15 years, some scholastic book fairs.
It's therefore, the perfect time to think I wouldn't boyko for his distinguished career at Scholastic and welcome to successor to carry forward. This legacy after more than three dedicated years scholastic 14 of which he served at the helm affairs.
<unk> announced since pending retirement earlier. This year, you may have seen or announcement yesterday welcoming sashi Quinn to join us as VP and president of Scholastic book fears on January 1st social is well respected and highly regarded <unk> in our industry was an impressive track record.
She began her <unk> 17 your career starting of books are fun and has held leadership roles at reader link and most recently served as VP and general merchandising manager bookstore for boards and mobile.
She and Alan will be working hand in hand for seamless transition and book fairs. Thank you Alan and welcome Sacher.
In clubs will revenues to decrease during the quarter in large part due to fewer teachers sponsorships and required sales tax collection cost reductions significantly reduced the impact on profitability.
Location, we recorded strong second quarter sales and classroom collections and professional services, well teaching resource and some seen double digit growth and don't dealer trade channels.
We're seeing continued strength in our customize classroom library business and we're very encouraged by the intense demand for newly launched rising voices Kate five book collections directed to African American and Latino Boys.
The accelerated growth in professional learning service and strengthens our position as a leading provider of a comprehensive approach to literacy construction, including personalized learning through digital subscriptions supplemental core Wheeling Prague products.
And as well as family community engagement.
As part of this as part of this we're experiencing a very positive response to our core reading program for grades gate of six Scholastic literature, you would literacy from pilots in early adopters and are optimistic about his future growth.
Turning to international during the first six months into fiscal year. We saw continued growth in Asia is trading education channels. We continue our focus on reaching a growing middle class of families interested in English language.
Learning.
After a strong brand proven effective products and gauging book in audio content, both print and digital formats are sold throughout Asia in school channels direct to the home and trade retail as well as through partnerships with large online providers.
Our core digital learning products scholastic literacy programs and.
Scholastic literacy pro library registered a 40% increase in active users across key markets and they should this year.
Also our trade business grew around the world, reflecting their ability to find the best authors and content in children's books.
They pick you just concluded his global do good tour, which included stops and Asia showing that his messages kindness and the importance of reading no no boundaries and Aaron Blaby continues to grow in this fall in as following with fans eagerly awaiting the 2020 animated 2021 animated film adaptation.
The bad guys.
In closing, we're encouraged by all of the opening subtraction related to our technology and efficiency approved improvements as guided by our scholastic 2020 plan and are focused approach to operating income improvements as I mentioned better cost management theaters and clubs is progressing or selective price increases appeared to be.
Accepted in the market and that technology related costs are down year over year.
With that background I will turn the call overdue can clearly CFO .
Thank you <expletive> and good afternoon today, I will refer to our adjusted results for the second quarter, excluding onetime items unless otherwise indicated.
As <expletive> mentioned revenues were $597.2 million versus $604.7 million in the second quarter last year.
The 1% year over year decline was in the face a tough comps with last year's release a fantastic. These the crimes are grindelwald, an original screenplay by JK rolling and the viral global sensation, Wonky, Donkey, which together accounted for nearly $13 million in net sales in the second quarter fiscal year 2019.
Partially offsetting this tough comp is make believe ideas. The UK based children's book publisher that we acquired in the spring completely or acquisition of a majority interest in the prior period results. Our minority interest in M.B. I was carried as an equity investment.
Adjusted EBITDA as defined was $129.3 million compared to $123.2 million in the second quarter of 2019 improvement of 5%. We believe the adjusted EBITDA as most meaningful measure of operating profitability and useful for measure returns of capital investment over time since it's not the store.
By unusual gains losses, and other items such as share repurchases.
Operating income was $107 million, a 4% improvement versus $102.9 million last year with a higher contribution on the margin, resulting from cost mitigation strategies, premiering or U.S. clubs and fairs channels as well as lower technology related expenses in overhead in the current quarter.
The current quarter also benefited from lower net sales tax expense and book clubs do the sales tax collection mechanisms put in place in the fourth quarter the last fiscal year.
We had $1.9 million a onetime items in the current period and both in overhead $1 million related to a settlement arising from an intellectual property producing agreement and $900000 in pretax severance associated with scholastic 2020 repositioning programs this compared to $4.7 million in one time.
In the prior period.
Now turning to our operating segments.
Children's book publishing and distribution second quarter revenues declined by 1% to $413.6 million from $417.9 million last year.
Second quarter's new trade Frontlist performed exceptionally well and we continue to see incredible strength from they build his dog man, where the first seven title send the top 33 spots on books gain at the ended the quarter. Both parents was also a key driver in the current quarter with a 2% increase in sales versus the prior year period as <expletive> .
Mentioned or previous investments and transformational technology and data analytics health this better manage and scheduling affairs in or peak period and drive down costs associated with the delivery of the fares improving our margin well. This resulted in a lower number fares mcwhorter as planned we saw both higher transactions per fair and higher revenue.
Preparing the quarter.
Despite clubs drop in sales lower staffing and promotional costs as well as higher sales tax collections as a result for our new collection programs helped to lessen the revenue drops impact on club profitability.
Lastly, we saw higher media and entertainment revenues tied to our new Clifford animated programming, which launched on Amazon Prime video Npbs Kids in early December .
Segment operating income improved 3% to $109.6 million, primarily on the lower operating costs in clubs and fairs.
Education segment revenues declined 2% to $69.9 million, mainly due to lower custom publishing in the segments National partnership program, which develops high quality content use by corporate and other sponsors to support learning in and out in the classroom.
Segment also saw growth in its classroom book collections business and in professional services.
There was a small increase in digital subscription revenue in the current quarter, specifically literacy pro which provides access to over 2000 fiction nonfiction E books for independent reading.
Segment operating income was $6.2 million versus $8.3 million in the second quarter fiscal 2019. It was mostly due to the lower national partnership revenues as well as higher amortization expense for components of scholastic literacy launch last year.
International segments second quarter revenues of $113.7 million.
Down 1% versus the prior year, what were slightly improved on a constant currency basis. After adjusting for the $1.9 million adverse impact of foreign exchange in the quarter in local currency terms, we saw growth and trade publishing in Australia, New Zealand UK and in India.
The Companys English language learning franchises in China also continue to grow with a strong branded products.
Operating income for the quarter was $11.7 million down $1.3 million from the prior year period, partially reflecting the lower revenues from the club unfair spoolbase channels in Canada, and higher expenses in Asia as well as the impact of foreign exchange.
Second quarter unallocated corporate overhead expenses were $20.5 million versus $24.7 million in the second quarter fiscal 2019.
The lower overhead costs, excluding onetime items in the current period is mainly due to favorable staffing levels and our technology operations as planned.
Net cash provided by operating activities was $111.9 million in the current fiscal quarter compared to $128.5 million last year or free cash flow was $87.7 million in the second quarter fiscal 2020 versus $93.5 million a year ago.
Variance is mainly due to higher working capital usage and the timing of payments made to suppliers, resulting in higher vendor discounts and rebates at quarter end, we had $277.8 million in cash and cash equivalents compared to $358.1 million, a year ago, but up $78.4 million versus our cash.
Cash balance at the end of the first quarter.
Second quarter, we had $17.2 million, a planned capital expenditures and $7 million and prepublication and production spend as well $7.1 million in open market repurchases and $5.2 million in dividends both reported below the free cash flow line.
Including repurchases made to date. The company is now bought back $20.3 million of it shares in open market transactions this year.
We are affirming our fiscal 2020 outlook for revenues in the range of $1.67 billion to $1.7 billion and adjusted EBITDA of $140 million to $160 million and we have more closely tied senior management incentive compensation to achievement of these adjusted EBITDA targets, our investments in new technology.
Data analytics, the key components of our capital spending plans. This year remain on track with overall capital expenditures projected in the $75 million to $85 million range.
We are continuing to drive positive process change through technology enhanced data analytics clearly evident this quarter by margin improvement in our fares operations through more efficient fair scheduling transportation and fulfillment fares now utilize live analytics dashboards power by tableau in square feet data cloud to analyze weekly.
Capacity into schedule fares, ensuring better utilization of resources, such as labor transportation inventory.
Lastly, we went live with our direct procurement management platform and Oracle this quarter screw system will support more efficient procurement standard costing clear view inventory by channel.
Laying the groundwork for better procurement decisions and processes in future periods, which we expect to report further on these technology enabled cost savings and process improvements in future quarters with that I'll hand, the call back to Gill.
Thank you can kill al if he would we are now ready to open up the lines for questions.
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Our first question comes from to come with Stifel. Your line is now open.
Okay. Thanks, guys good afternoon.
So it seems like you're able to make some progress with clubs and fairs again some of the issues that impacted the business back in the spring.
As we look at the second half of fiscal 20, you're up against easier sales comparison with that in mind should we assume an acceleration for these businesses and I guess similar question as it relates to segment profitability no given some of the initiatives you highlight it could we see.
Similar year on year improvement in the second half for children's books. Thanks.
A good question. Thank you.
Good.
We are struggling a little bit with the with our revenues in clubs.
And what we've overcome those by very some very good cost management cost control, including mailing fewer kits.
We do expect that revenue to continue to be a little bit below where it was last year.
Right.
We did it will be going up against the.
Reduced fourth quarter, so we should be able to pick up something there.
Fares are seems to be quite strong.
We expect that we will have continued improvement in fears.
<expletive> which business.
Are you seeing the acceptance of the price increases.
There's or clubs or both.
Yeah, I don't think we're seeing any significant price resistance in either of those businesses. We have modestly increased prices to overcome the impact of rising paper costs and the tariffs.
But we certainly haven't.
Haven't had resistance from our customers bearing in mind that we have an extremely strong lineup of trade books and.
Which are also offered on affairs and our clubs. So we're we're we're with our very strong product offerings people are really not calling attention to the pricing there just a grabbing the these books as fast as they can.
Okay, Okay, I apologize I misspoke I thought it.
Oh, hi, acceptance not resistance, but sounds like customers that had been accepting of the price increases.
Yes, I would say so yeah got it okay. Okay, and then a couple of questions on the trade business.
First a housekeeping item.
The the revenue from Clifford the enemy programming on Amazon Prime and TBS Kid.
With that picked up in the fiscal second quarter.
Well in fiscal Threeq you.
Yes. It was picked up in the fiscal second quarter. So we delivered the product and it was available DBS and Amazon opted to launch it in December .
Okay and.
It took the initial or the planned initial print run for the balance of falling burden snakes is two and half million copies, how does that compared to some of the other hunger game books.
Well, it's certainly it's in in keeping with the.
Initial printings effect is higher than the initial printings of some of your book.
Got it so works we're expecting.
Very good market response, and then we're getting tremendous of.
Support from all the channels that book has been you know top seller on Amazon those since the day it was announced.
Okay, and then shifting to the dog Man series.
Looking through some numbers our senses.
At least the initial print run for the book launched in August with smaller versus the most recent title Oh, sorry can you talk about the relative performance for the book what that was launched in December relative to some of the others you've launched in the past couple of quarters here.
Well the book that we just launched in December was had a tremendous struck the positive response, others out selling the the book that came out in August So we see in the dog the taste the a drive for dog man among our young customers is greater than ever.
Got it Okay and then just lastly on cash flow can you talk a little more about some of the unfavorable changes to working capital that you saw in the quarter and then just any update on priority is wrong uses of cash I think as maybe three years ago you guys.
We're planning to do and accelerate share buyback yeah that was eventually scrap but that's something that you would reconsider.
So so hatred. This can yes, so in terms of working capital and really the payables we have.
Utilize cash to.
Negotiate with vendors on terms regarding or early pay discounts. So that has caused us to utilize some cash and there's some just pure timing in when the payments were made this quarter. So.
We're looking at some of that in terms of plans going forward as we've mentioned in the past we're always in conversation with our board regarding that and we don't have an announce anything you announced at this point in time, but again, it's it's constantly being discussed you did see us buyback a larger number shares.
This this quarter and really this year to date Opportunistically any open market and.
That's that's.
Good part of what you're seeing in terms of the total cash declined in the year.
Got it okay. Thanks, guys happy holidays. Thank.
Thank you drew thanks drew.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Richard Robinson for closing remarks.
Well. Thank you all for your support.
Supportive scholastic and we're happy about this quarter and we're looking forward to fulfilling or financial goals for this upcoming year as well as delighting our customers with the amazing books that we're putting in their hands happy holidays to all.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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