Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Well, ladies and gentlemen, thank you for standing by and welcome to the Houghton Mifflin Harcourt fourth quarter earnings call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone please.
Please be advised to today's conference is being recorded.
If you require any further assistance. Please press star zero I would not only to hand the conference over to your Speaker Mr., Brian shifting senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone before we begin I'd like to point out that the slides referred to on today's call can be found at the Investor Relations section of our web site at HMH C O Dot com.
A replay of today's call will be available until March nine 2020, and the webcast will be available on our website for one year.
Our 10-K was also filed earlier this morning, along with our fourth quarter and full year 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 and our 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. majors, Chief Financial Officer will provide a company update as well as an overview of the company's fourth quarter and full year 2019 results.
After our prepared remarks, well open the call the questions.
During the Q and 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.
[noise] good morning, everyone.
[noise] 2019, with a very strong year for HMH.
A record results.
Were driven by successful execution of a tragic it does produce sustained.
To your free cash flow.
The only for the full year were up a record 21%.
Why would the most recent guidance that we raised twice during the year.
Importantly.
We delivered strong performance in both.
In extension.
Were there any education segment.
27% for 29 cheap.
[noise] strong billings.
Translate into robust free cash flow.
Each major unlevered free cash flow margin.
Approximately 12 percentage points in 2019 versus the prior year, and we generated $115 million positive free cash flow.
Our next generation core intra reading into future pod cadre, 856% share in the Texas, usually adoption in a leading share.
In other state adoptions.
This is validation.
Validation of the new innovative programs, we brought to market that are helping teachers differentiate their instruction.
To meet the needs of each student regardless of where they may be on the achievements better.
We added to our core <unk> offerings, we treat new AI based supplemental products.
Era.
Michael Enlighten health.
Help extend teachers reach to dance student learning.
[noise], we also took significant steps to simplify our business model and accelerate our growth this year.
For example.
We realigned our cost structure, which will improve h. majors profitability at any point.
The option cycle.
We enhanced our capital structure by reducing our debt by over 10%.
In refinance the remaining portion to extend the maturity.
We also reduced stark capital intensity.
It is meeting a shift to a continuous development and delivery model.
A model designed to improve customer experience.
[noise] stepping back when we compare the company we were in 2018.
When we began implementing our strategy to the company we are today.
It's clear that our execution is paying off.
As Joe will speak to we've dramatically increased our ability don't come free cash flow at all points in our business cycle.
Some positive free cash flow in the trough.
To substantially higher free cash flow in the peak.
By leveraging the position we have with course solutions to cross sell extensions available on one unified platform.
Underpins all of our solutions.
We will capture and increasing share of a $276 per student per year spend.
In 2019, we also delivered a step change in our digital capabilities.
We grew our emerging SAS based extension business dramatically.
Yeah, great momentum for exceptional growth in 2020.
Our new we sat based programs recently won best in show check and learning Awards.
Important industry validation of these new AI driven programs.
And we continue to add to the list of cross sell core extension wins.
All of these achievements validate the traction our strategy is getting the market as we deliver and enhance.
Better together experience to our customers.
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Now turning to the financial highlights from 2019.
For a total education segment, we achieved strong billings growth.
27% for the full year.
Our core solution billings were up 4% in the fourth quarter and 44% for the full year.
We achieved a 56% market share in the Texas equally adoption due to the strength of our newly released into programs and a leading share.
All other adoptions.
During 2019.
And.
We saw higher Florida mass killings from contract extensions.
[noise] extension billings were down slightly in the fourth quarter by 1% overall up 11% for the full year.
This was our second consecutive year of above market growth in extensions driven by continued strength.
Hi, human nationally.
Our momentum reflects our focus in investing in improving the overall quality of our products.
Today.
We now have digital.
Captive and personalized solutions on a single platform and we are uniquely qualified to meet the needs of students across the entire achievements spectrum.
We're very pleased that we receive third party validation acknowledge our efforts on this charge.
Every single one.
Of our core next generation, usually a math programs have received all green quality scores.
Hi, this rating from the third party instructional materials evaluator and report.
Turning to HMH books and media.
Billings were down 10% for full year 2019 as anticipated.
Due to a tough year over year comparison from a onetime orwell deal in 2018.
Our fundamentals however remains solid.
With low single digit growth expected over the long term.
We continue to deliver award winning multimedia content.
For example in 2019 joint value from the extensive backlist portfolio, including through the release of a deluxe edition of the Hanmi tail. This year.
Lois Lowry Giver was also the number one best selling yoga dike young adult title.
2019 holiday season.
We prepared to hinder audio titles for release in 2020, we launched etch a new in print and our books for young readers group that is dedicated to publishing graphic novels, exemplifying the best in art and storytelling across genres and reflects the diversity.
Of young leaders.
The seven titles on the edge launch list will publish beginning in September 2020, and going forward, we expect the in Printwear relief around 15 Bucks per year.
Our Carmen Sandiego regional Netflix animated series. The first project produced for the screen buyer in House production Company HMH Productions, receiving nomination for a 2019 Primetime Emmy Award.
Finally.
Regarding our lifestyle titles, we had to New York Times Best Sellers, this year, including Beijing with Babish Ann Anthony in the kitchen.
I'll now turn it over to Joe will provide a deeper dive into our 2019 financials and our guidance for the year ahead.
Joe.
Thank you Jack and good morning, everyone. Thanks for joining us on the call.
Never Jack talk about how our transformation efforts paid off in 2019 and delivered very strong results.
I'd like to now walk you through the financials as well as our Twentytwenty outlook.
In 2019, we delivered on our financial guidance for the third consecutive year.
Our full year billings were $1.591 billion inline with the latest guidance update we provided in October.
We raise billings guidance twice during the year.
In August and are happy results and an October at our Investor update.
Our content development spend and total capital expenditure for both in the bottom half of our original and updated guidance ranges for these metrics with the former at $103 million in the latter at $140 million.
We also delivered $115 million of free cash flow in the upper half of the guidance range that we provided at our October investor event.
Before delving further into the financials, let's take a look at how we're performing against our long term billings growth framework and mix of billings.
As a recap we expect the long term average growth of course solutions to be in a low single digits with annual growth in any given year consistent with the changes in the new adoption market opportunity.
In 2019, which offers a large new adoption opportunity.
Our solutions billings were up 44% and contributed 48% of our consolidated billings mix driven by 56% share of the Texas English language Arts adoption.
Leading share and all other adoptions and strong performance nationally.
For extensions, which comprise kinnamon intervention supplemental and assessment products as well as professional services.
We started the year expecting low to mid single digit growth.
Consistent with the long term growth rate of this segment of the market.
As you know we raised our assumption for this category of our billings twice during the year as growth accelerated.
2019 marked the second consecutive year, we achieved above market growth for extensions and for the full year extensions billings were up 11% $654 million.
As you heard from Jack earlier, this was driven by continued strength in Heinemann in Texas and nationally.
We expect books and media to deliver long term average growth in the low single digits consistent with market growth rates.
Billings for books and media were down 10% in 2019 as anticipated.
This segment grew well above expectation in 2018.
Our outlook for the books and media business remains solid and we continue to expect low single digit growth overtime.
Now turning to our 2019 cost structure, an area, where we made significant headway this year and containing fixed cost growth.
We expect to maintain the improved cost structure going forward and we will see a full year benefit in 2020 in 2019, our adjusted fixed costs were essentially flat and then year at $619 million.
Our restructuring plan in October 2019 transformation plan helped us offset some planned investment or extensions operations.
And our cost containment efforts throughout the year helped us to offset inflationary pressures due to merit base salary increases.
Adjusted variable cost as a percentage of billings, excluding noncash or nonrecurring on items.
Were 38%.
Down from 2019.
The large contribution to billings from our core solutions adoption wins, particularly in Texas contributed to this lower percentage.
Moving onto our fourth quarter and full year 2019 results.
Net sales for the quarter were $241 million down 3% from $249 million in the fourth quarter last year.
For the full year net sales were $1.391 billion.
Up 5% compared to 2018.
Our billings, which we defined as net sales plus the change inferred revenue declined year over year on the fourth quarter by 3% to $201 million.
For the full year billings were up 21% to $1.591 billion in 2019.
Driven by record growth of 27% and our education segment.
Within Education course solutions billings grew 44% to 758 million and extensions billings grew 11% the 654 million.
Slightly offsetting the growth in our education segment, with an anticipated, 12% and 10% decline in HMH books and media for the fourth quarter and full year respectively.
For the full year 2019, or net loss from continuing operations was $214 million and adjusted EBITDA for 2019 was 166 million.
As we recognized selling costs in advance of revenue for multiyear core solutions contracts.
Free cash flow, which we defined as cash from operations less capital expenditures was $115 million compared to a usage of $73 million in 2018.
This significant 188 million dollar year over year improvement.
Well they result of our strong billings growth adjusted fixed cost containment and a reduction in total capital expenditures.
We finished 2019 with $296 million of cash cash equivalents and short term investments compared to 303 million at year end 2018.
Before moving to our outlook, a reminder of the dramatic improvement in our ability to generate free cash flow, resulting from our strategy and the actions we took in 2019.
In October we shared that as we look out over the next three years, we see healthy new adoption opportunities in the core market sizes that we consider to be mid cycle.
We expect continued compounded growth of our extensions and we expect billings in the range of 1.5 billion to $1.65 billion.
We expect efficiency gains in our fixed costs to improve our profitability.
And we expect our capital constrained continuous development model to reduce product development spend as a percentage of billings relative to our legacy model of episodic product program development.
We expect these changes to dramatically improve our unlevered free cash flow margins to a range of 9% to 14% of billings as much as 500 basis points of improvement relative to 2019, which is our most recent peak adoption there.
These same changes applied on a pro forma basis through our last trough in our last peak would have substantially and dramatically improved free cash flow at all points in our cycle from positive free cash flow neutral to substantially higher free cash on the peak.
And we're a little less than two years into our transformational strategy.
As we continue to grow through enhancing and that is extending our core capture more share from our integrated solutions approach and further simplify our business model, we expect to continue to increase our free cash flow and margins over time.
So it is important to remember that this is a baseline.
But the next time, we reach a trough for peak, we expect substantially better free cash flow and free cash flow margins.
Now turning to our expected financial performance for 2020.
We expect total company billings to be at or below the bottom end of the mid cycle range of $1.5 billion to $1.65 billion.
As has been our practice for the last three years.
We strive to set billings expectations at the beginning of the year that appropriately recognize the early stage of our selling activities in February.
We will provide updates as we progress through our quarterly financial reporting.
Consistent with the view that we shared at our October Investor event, we expect our Unlevered free cash flow margin to be approximately 9%.
Unlevered free cash flow removes interest expense from the calculation to underscore the underlying cash flow generation or a business before debt service.
New for Twentytwenty.
We are beginning the year guiding to our expectation for free cash flow, which does include the impact of interest expense.
We expect to generate free cash flow of $65 million to $90 million, marking a continued trend of positive free cash flow.
In conclusion.
We are entering 2020 with good momentum and having made significant progress in 2019 in transforming our company for the future.
Driving billings growth through the strength of our portfolio.
Simplifying and strengthen our business model.
Reducing our costs and generating sustained positive free cash flow.
With that I will turn the call back over to Jack for some final comments before we take your questions Jack.
We have very proud of what we've achieved in 2019, a year of tremendous strength for HMH driven by relentless execution of our strategy.
We achieved guidance for the third year in a row and rate billings guidance twice during the year.
Our full year 2019 results demonstrate to continuing merits of our strategy to drive sustained positive free cash flow.
We accomplish and improved cost structure and improved capital structure.
While simultaneously, reducing the capital intensity of our business.
Our recent wins indicate growing momentum in the business.
And our outlook for free cash flow $65 million to $90 million in 2020.
Well, Mark a continuing trend a positive free cash flow.
We're confident.
Entering the year from a position of strength.
With greater strategic flexibility to invest in our growth and.
His ability to generate greater free cash flow at all points our business cycle.
We'll now be pleased to take any questions you may have.
Operator, you may open the lines.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q to withdraw your question. Please press the pound.
Please stand by while we compile the culinary roster.
First question will come from Bill Warmington with Wells Fargo.
Good morning, everyone.
We are bill.
So the a extensions business had another strong year.
Total I did want to get some color on the 1% decline in the fourth quarter is that timing tough comp something else going on there.
No Bill this is.
Pretty consistent with what we see in this fourth quarter, which is it's not a material.
Quarter for us.
Really the most of the activity occurs in the second and third quarter.
So 1% is going to within the bounds of basically flat, we'd expect that to be year over year.
Okay.
And then I was hoping we could get some color on the how the California science adoption is going and then maybe some updates on anything new on Florida.
Yep.
Hey, Bill this is Jack.
I think as you know this is in California is a three year adoption. We are now in year to feel very good about the program.
Year to but really at this at this point year to too early to comment on the specifics of the adoption.
As it relates to Florida.
As you know we are getting ready for a major equally adoption in 2021.
Few really good about the program that we're going to be delivering for evaluation midyear. This year by school districts.
Purchasing in 2021.
Great. Thank you very much.
Thank you. Our next question comes from David Pang with Stifel.
Hi, good morning, everyone.
Just want to update inside on the size of new adoption market for 2021.
Hey, David It's Joe the.
We have characterized this as a mid cycle year. So as you know we've got to Texas literature, which is a major opportunity we've got the California science adoption.
We haven't size the new adoption market for this particular here just given the early stages that were at right now in assessing the overall market opportunity, but you should consistent with our.
Three year outlook that we provide an investor day, you should consider this a mid cycle core adoption year.
Certainly not as large as it was in 2019, but but.
Certainly much larger than it was in 2018 or last trough.
Okay again, ladies and gentlemen, if you have a question at this time. Please press. The Star then one can you and your Touchtone telephone.
Our next question will come from George Tong with Goldman Sachs.
Hi, Thanks, good morning.
Turning to California late last year, you'd indicated that districts are deciding to delay their purchases until after pilot programs. You said, it's a little bit too early still did the to discuss.
Actual purchasing behavior in California, but can you just provide an update on purchasing timing and conversations that you're having with districts in California, how they're progressing.
Yes, George that is right. The first year tends to be in this three year process more of a pilot year. Although certainly there were districts who made decisions in the first year, our expectation is that year to.
More and more of those school districts, you've highlighted the program in the first youre, making decisions.
Then obviously in year three as well.
Got it and then how would you characterize the overall conversations that you're having in the first year with with the districts.
Yes, good discussions.
We had.
Number of major school districts, who have taken on pilots or the program we've had.
Customers, who purchased the program. So all in all we feel very good about the program.
Great and just a follow up on the open territories. The penta pause there textbook purchases leading up to a major adoption cycle now that we're in the middle of adoption cycles can you elaborate on the growth that you're seeing in your open territories.
Yes, I think the first point is that 2019, we saw growth overall in open territory I think as we indicated in previous calls.
We had a.
A significant growth in our win rate and lay which was our newest program introduced in the open territory, 9% high win rate in.
In the open territory. So we feel very good about the overall market in open territory I returned to growth and we feel very good about our competitiveness and open territory.
Very helpful. Thank you.
And operator, I just want to jump in.
I may have.
Answered about 2020 in response to David's question and I think his question was about 2021 and the new adoption opportunity. So that also as a mid cycle year for us in terms of new adoption opportunity.
The major adoption there of course is the Florida English language arts grades K through 12.
That though that we were just talking about and will be submitting for evaluation mid mid year here.
Okay speakers I'm showing no further questions in the queue at this time I would now like to turn the call back over to you for any further remarks.
Okay. Thank you very much for listening to our call. This morning, and we look forward to speaking you to you again in first quarter earnings call. It may have a great day. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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