Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Scholastic reports Q3 fiscal 2020 results conference call. At this time, all participants will listen only mode.
After the speakers presentation, there will be a question answer session to ask a question on especially we need a press star one on your Touchtone telephone.
Please be advised todays conference call is being recorded.
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I went out to hand, the call somebody speaker today, Mr. Gil Dickoff Senior Vice President Treasurer, and head of Investor Relations. Sir. Please go ahead.
Thank you very much foundry and good afternoon, everyone and thank you all for participating on today's call will come to scholastic <unk> third quarter 2020 earnings call that me here today, we kicked off in turn our chairman President and Chief Executive Officer, and can theory, the company's Chief Financial Officer.
Posted an investor presentation on our IR website under Investor Dot Scholastic Dot com, which we encourage you to download if you have not already done so.
I'd like to point out that certain statements made today will be forward looking this forward looking statements by their nature are uncertain and may differ materially from actual results.
In addition.
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 Companys earnings release filed this afternoon on a form 8-K, which has also been posted to our Investor Relations website. We encourage you to review the disclaimers in our.
Press release, and Investor presentation, and should we view the risk factors contained in our annual and quarterly reports filed with the FCC and now I'd like to turn the call over to Dick Robinson.
Good afternoon, everyone and thank you for joining our third quarter call.
What a difference 20 days has made.
Especially in or out your outlook for the year.
We finished our strong third quarter, just three weeks ago.
Our results showed continued strength in trading book fairs excellent growth in education, putting US ahead of our adjusted EBITDA targets for the third quarter in the nine month year to date.
No millions of students in many states or at home due to sweeping school closures to help curtail the spread of Corona virus with their parents and teachers doing their best to ensure that learning continues remotely.
In the March to meet period of any other here.
Our school days book Fairs, and book clubs would be in full operation in 30000 to 40000 schools.
Your after a strong start in the first two weeks of March.
Just in the last few days, we have seen many of those schools either closed or preparing to close.
This disruption as far reaching and we're looking at a challenging situation in the final month suburb of for 20 quarter normally our most profitable period of year.
Build its too early to know the magnitude we will have less revenue in the quarter and therefore, we need to withdraw our guidance.
Well, we were finding new sources of revenue.
As schools turned to us to help them to provide better home learning and we continue to provide services to schools weve simultaneously the focus the company, reducing costs preserving cash and ensuring the safety your where employees and customers throughout the U.S. and globally.
Sure when do you know a number of ways we're doing so.
We're making hard but necessary decisions to aggressively reduce costs throughout the organization or first action weeks ago. We the safety of employees as a priority was to cease all non essential business travel and functions.
As the situation has evolved in intensified we expanded efforts, including including increased Telecommuting. We also now have a high level rapid response team in place to take action implementing mission mitigation plans as possible.
In this unprecedented moment, we temporarily closed up to half of our book their branches in the most highly affected areas over the country as numerous schedule School book fairs had been canceled and others postponed to later in the school year, Similarly, we're reducing or eliminating schedule promotions for a book club.
And anticipated some and anticipate some lost and post <unk> revenues and our education business, even while we were securing special orders from schools to provide books and online learning maturities for kids at home or when they go to pick up meals at schools are centers, which are opening to provide food.
Additionally, staffing costs are being reduced be a hiring freezes boroughs and other related labor related actions and we're kind of curtailing all costs not directly connected to revenue production in the quarter.
We're also preserving cash flow deferring capex, reducing inventory purchase installation longer term projects and more effectively managing inventory.
The 40 million pretax noncash write down of inventory in the third quarter will enable us to manage your book product more effectively to maximize focus on the newer titles.
We also have a very strong balance sheet with 250 million current cash or Unlevered, New York building in an excellent revolver in place.
This cash will enable us to manage through our current still slow down the spring and through the summer months when schools are not in session as well as into the next school year. Your therefore prepared first period of slower sales should that persist. After this quarter. However, we believe that most schools will certainly open in the fall.
If not sooner.
And clearly we'll give you more detail on actions, we're taking to reduce cost preserve liquidity and communicate to customers employees, while focusing on specific efforts to support our revenues in the quarter.
Let me review some important actions, we're taking as we address this evolving situation by supporting parents and teachers with tools that will help them with their children and their lives and provide a sense of continuity whenever possible and the best way. We know how we've recently released to be free digital hub of up to four weeks.
The daily instructional content to support learning at home when schools are close.
The positive response to scholastic learned at home was immediate <unk> administrators teachers, and especially parents actively utilizing these tools some telling us that we have become a key part of their schools home learning plan.
CNN story on this went viral sharing our resources beyond our own that works and according to a news tracking service was the most engaged article related to Corona virus from around the world in the English language in the 24 hour period, a few days ago.
Under a week more than 8 million visits an initial reports of 17 million page views are increasingly hourly of scholastic three scholastic learned at home is engaging with millions of families across America and the world who are using her age appropriate resources for home learning.
And what it would acknowledge the dedication of our staff, who every day you are honored to have our role as partners from schools and families, but the value of the service can increase exponentially in times of crisis. When there is an exceptional need.
To meet this need or employees in our experts all work together with their customers to do what must be done and we showed her ability to help children learn at home in a time when they greatly miss the opportunity schools provide.
We do think that this will give this will open up the market for more home learning in the near future.
Changing the focus to our core business in third quarter I.
I would like to provide a few highlights to acknowledge our success in December to February period.
Or trade books continue to be exceptionally well received publishers weekly recently named Scholastic a best seller King as we led the children's front Lucia front was fiction chartered in 2019, and 2020 or titles continue to top bestseller lists recording of 17% increase in revenues in third quarter.
Bestsellers include the comparable dog man such 22 released in December two you Sutherland's Windsor Flyers Special edition Banyana land buying new knows right, Brian as well as the number of others looking forward hunger games stands the weight. The may release of the Belgium song birds and snakes, the new novel basins.
<unk> Collins.
As I've mentioned before or cost saving strategies benefited both fares and clubs this past quarter and clubs will revenues decreased we reduced our sales tax expense year over year.
As we are now collecting tax on all online orders are enhanced data intelligence of also allow better targeting and promotional spend furthering cost reductions and improving sales profitability or book Fair business has maintained its positive momentum from our very strong well performance with improved revenue per.
They're in the quarter. This is all this all has provided us with the strong foundation to manage the challenges faced during school closures as we nimbly work with their school partners to rebook fares as needed and while we support our school customers ensuring that those fears which are held can go on as planned and the most responsible way.
Education, we recorded a 23% growth in sales across classroom books professional learning core instruction and classroom magazines.
In this unprecedented time for schools are teams are first working with educators to meet their immediate needs to serve students were remotely through not only are free tools, but also assisting with home schooling in any way, including workbooks take home book tax digital programs, all from scholastic or telephone.
Service staff are still working with the with the professional.
Peoples, who weren't stolen and otherwise close schools to ensure that books in or other construction materials will be available when children return or even creating special opportunities for kids to get online construction or physical books, while they're learning at home.
For example, just yesterday the Barbara Bush Foundation partner with Us to by 150000 books for distribution in Houston to children in need when they go to centers to pick up their daily free meals. The foundation made this decision in less than 24 hours working with the scholastic staff and many some similar opportunity.
These are coming up every day.
Turning to international or success in trade maintains its reach across the globe is the Corona virus initially spread through Asia. There was an unavoidable impact on our Chinese China franchise schools, and our direct to home market in Asia. This past quarter. However, we successfully mitigated any supply chain issues and.
We remain encouraged by the overall response in the region to our strong scholastic brand.
We are committed to serving the region as displayed during this uncertain period by Air China, and Korea teams and credit created online learning.
The teacher trainings in or in our 200 franchise English language schools, well provide providing online courses for students home learning at the same time, we've been selling books to parents that home for the use with their children, both in China and elsewhere in Asia to use when kids are not in school. These sales appear to be picking up.
Again, as the pandemic decreases in China, and South Korea.
The scholastic entered its hundredth year in 2020, we did not expect that the new year would also bring the corona virus and the impact it has had on schools and learning all over the world.
However, the most relevant were word in the last six history and one that my father, often use with me when I was learning the business.
His resilience.
We have overcome innumerable obstacles in or 100 years, and we're now being challenged again by the current situation or value to worse or school teacher paired in child customers. This is in providing easy to use high quality books in magazines and learning programs that relate to children's interest.
Well, helping them to learn well.
This is an integral part of our history of providing relevant education.
Once again in the past week, we have met the it needs with educators parents and children through the scholastic learned at home digital hub.
Millions of children are learning from our resources, which the kids themselves are operating enabled by the creativity of content in design, which the company has learned over a 100 years some service the schools and families.
The skill of capturing child interest in enabling them to learn easily is a hallmark and birth rate of scholastic is this passion dedication understanding and above all the skilled this expertise which keeps us relevant.
Well, we're reducing cost and protecting cash resources. We're most of all committed to ensuring that we will maintain the company's strength and resilience to overcome the obstacles, we temporarily finding our way and maintain and expand our drive to help schools parents and families globally as we work through this challenging quarter and beyond.
And until we return to greater normalcy armed with a greater insight.
Understanding that this crisis will provide.
Now I will ask a then turn this call over to can Cleary.
Thank you Dick and good afternoon.
We'd like to reiterate Dick's thoughts and hoping that you and your families are all safe.
Today, I will refer to our adjusted results for the third quarter, excluding onetime items once otherwise indicated.
The full scope of the impact of the krona virus in terms of magnitude timing and duration with the daily knows there's a school closings remains to be seeing and we're not able to mean meaningfully project their impact on our important clubs fairs and education businesses at this time.
We are cross functional task force that throughout the company to one track both school closings in any disruptions to our supply chain to communicate effectively with our staffing customers and three.
He quickly actionable solutions to mitigate the effects of lower sales and profits on our financial position.
These actions include safeguarding our employees.
Building process isn't protocols to ensure that we can effectively execute critical business functions during the current crisis.
Eliminating all non essential business costs and delaying certain long term projects to preserve cash.
Scaling our operations to meet near term business needs, including reducing our inventory purchases.
Reducing fixed and administrative costs again to preserve cash.
We pointing our assets to me crisis specific customer needs such as at home learning materials.
In ensuring adequate access to capital resources.
We ended the quarter with almost $265 million of cash.
On hand, and unfettered access to committed $375 million revolving credit facility, which is currently on use.
In the current quarter the company recognized a $40 million noncash charge for inventory, resulting from lower anticipated inventory requirements in the company school channels and the current fiscal year. The complete company implemented a new systems processes and centralized management structure to better coordinate our demand planning.
Procurement activities across the company and to optimize our inventory utilization management. This capability will be critical to preserving cash as we tended to meet the evolving needs or our customers. During this crisis.
Despite the large noncash write down that affected our gap or as reported results. The scholastic businesses taken as a whole performed well and ahead of our plan in the third fiscal quarter seasonally quiet quarter for us revenues were $373.3 million versus 360.1 million.
Dollars in the third quarter last year.
The 4% year over year increase in the topline was driven by education with growth across all major lines of business classroom books professional learning core instruction and classroom magazines and in trade both domestically and in all major markets.
Adjusted EBITDA as defined was $5.6 million compared to $1.4 million in the third quarter 2019.
As stated in the past we believe the adjusted EBITDA is the most meaningful measure of operating profitability and useful for measuring returns on capital investment over time since there's not the story by unusual gains losses or other items such as share repurchases.
Operating loss was $16.8 million versus an operating loss of $18.7 million last year, even with higher tariffs impacting our cost of product in the quarter.
Side from the noncash inventory adjustment, we had $3.2 million in pretax severance associated with scholastic 2020 repositioning programs.
Now turning to our operating segments children's book publishing and distribution third quarter revenues increased 1% $220.2 million from $218 million last year.
Our trade groups, 17% year over year growth in revenue was primarily driven by day pills. These dog man titles in both our frontlist them back with as well as the inclusion and make believe ideas.
Our book Fairs business also grew on higher revenue per fares held in the quarter.
Offsetting the increase in trade and fares was continued softness in book clubs will decline in both the number of club events held in revenue per event.
Segment operating income was $2.2 million versus $4.4 million in the prior year period, mainly due to a higher contribution on the onetime media sailed older quit for programming last year.
Education segment revenues rose, 23% to $74.3 million, mainly due to higher sales a classroom books corn instruction professional learning services and classroom magazines.
Sizable year over year gains were seeing in our guided reading of spaniel and level book room product offerings, as well and aren't as in our scholastic news line and classroom magazines.
Segment operating income was $9.8 million versus $300000 in the third quarter fiscal 2019 and was mostly due to higher revenues across all major lines of our education business.
International segments third quarter revenues.
$78.8 million were down 4% versus the prior year, but were down only 3% on a constant currency basis. After adjusting for the $500000 adverse impact of foreign exchange in the quarter. The biggest year over year drop in revenue was in our direct to home consumer selling operations in Asia, and our China business, which were.
Is impacted by the early onset or the current a virus and related mandated requirements imposed during the quarter.
The international trade business was strong in all major markets driven by dog man hours Wells locally published favorites segment operating loss was $3.7 million versus a loss of $2.5 million in the third quarter fiscal 2019, after adjusting for the $500000 and onetime items in the prior period.
Third quarter unallocated corporate overhead expense was $25.1 million versus $20.9 million in the third quarter fiscal 2019, the higher overhead costs, excluding onetime items in the current period was mainly due to settlement a pre 2015 photo license infringement claim.
James and related defense costs.
Net cash provided by operating activities was $29.7 million in the current fiscal quarter compared to $21 million last year and free cash flow was $4.9 million in the third quarter fiscal 2020 versus a free cash used to $10.4 million year ago. The favorable variance was mainly due to lower.
And Tory purchases and favorable working capital usage in the current period as well as long as well as lower capital and prepublication spend as planned.
In the third quarter, we distributed $5.2 million in dividends and repurchased $13 million of our shares in open market transactions on the rule Tenb 18, both reported below the free cash flow line.
Including repurchases made to date the company now has brought back over 1 million shares in open market transactions this fiscal year.
As discussed we're no longer affirming our fiscal 2020 outlook for revenues and adjusted EBITDA given the uncertainty in the markets to the global Corona virus pandemic mandates school closings and other actions taken or curtail with spread.
We're working diligently to support our school customers ensuring that students learn from home have the resources they need to succeed, especially those digital resources that may be easily access for use by students and teachers without putting anywhere in harm's way.
We hope the impacts on our business will be short lived however, as discussed we're taking aggressive actions in all areas of the business not the least supply chain warehousing and transportation to reduce operating costs, while protecting our strong balance sheet and building a firm foundation for growth in future periods to that end. We're also close review.
Doing.
Non mission critical capital spending plans have commenced selected branch closures in the most highly impacted areas of the country in terms of school closings wherever feasible.
Urge you all stay safe in these difficult times and with that.
I'll hand, the call back to go for the Q and they session.
Thank you, Ken and Valerie whenever need to open up the lines for questions.
Thank you.
Again, ladies and gentlemen, I'd like to ask questions. Please press Star then one on you touched on telecom.
One moment please.
We have a question from drew Crum of Stifel. Your line is okay.
Okay. Thanks, Hey, guys good afternoon.
First question.
Maybe for Dick just trying to frame or understand how clubs and fairs performs then fiscal fourq to obviously several variables here at the very fluid situation, but it is unreasonable to think it could be comparable to fiscal one to from a sales perspective.
Well we.
You know in the fourth quarter or we speak about the fourth quarter at this point, yes, yes, the sales for clubs and fairs and fiscal for sure here thinking about it relative to the physical one Q, which clubs and fairs aren't really open for business. So I see no well.
Right now.
Schools are closing everyday some are planning to reopen well we've scheduled fares.
Weve reschedule fares for for later in the year in case the schools reopened.
I think I think it would be.
I would think we would still do better in this quarter than we would do until last summer and clubs and fairs, but but I, but clearly we're gonna be.
Pack that by the.
School closings across the United States.
Understood Okay, Yeah, and then.
A little surprise this year that you're sticking with the release.
Her gains.
Walk walk us through that process sure.
The ability to move that really stayed there yes, we do that our trade group is really on top of this.
They're studying it every day there were talking to booksellers.
We probably have another.
Month before we have to really.
Decide that question.
But the would there they're thinking everyday okay. What is going to happen will the stores be open what's going to be the case.
They are they're considering various options, but right now they feel strongly that.
That they want to hold to the date for now, but we do have the option of changing it a little bit later sorry. Good question, that's very much on our minds of course.
And I think as expected you mentioned some weakness in Asia during fiscal Threeq to it seems that at least through the process the conditions or perhaps starting to improve their lease stabilize or are you seeing any uptick or any stabilization with your business in Asia.
Yes in the into fiscal <unk>, we're getting right now.
Right now we're getting sales in there, which we do not get from the January Twentyth two now.
So.
And we're seeing a.
The people are shipping inventory I missed some of it was just the fact that nobody was doing anything right everybody was.
Confined to their quarters.
And there was no activity going on that's picking up now and we are forecasting some sales in April and May in China and Asia.
Okay.
Have you guys said the access your credit facility in the school for Q I think you guys have.
$375 million.
Yes.
I think it's 375.
And we normally we do access that facility in the summer.
And we we are we probably will do so again this summer.
But as we tried to project for you threw in this call.
We look forward on on liquidity side, and we are confident that we have resources that will bridge us.
So and that is through the summer and into early next year report or beyond.
Okay, and then kind of unrelated note I'm just in terms of uses of pass it through the board authorized another $50 million and share buybacks, given where the stock is trading that currently.
Is there an increased appetite to do share repo or are you in more of a capital preservation mode for the yeah. We've done our first order business is preserving capital data we've had to previous we've had two previous 50 million dollar authorization in 2015.
In 2018.
Aboard a water to schedule.
The one at this time, but the whole point is is it stride powder.
In the event the things change and we moved from a capital preservation mode, we will be able to have that available.
But our focus first over business is preserving liquidity and focusing on.
Reducing our cash needs and the company. So we can preserve our or liquidity over the longer period.
Okay and then just one last one for me looking ahead.
In one and and we.
We didn't notice package for school.
Jason similar to.
What we saw back in 2009, which helped your education business.
Yes, I think there probably will be I mean I think.
You know schools are obviously, you only 10% of this funding of schools comes from the federal government.
The <unk> the rest is divided pretty equally between states and local real estate taxes, but there obviously is going to be some of you know some disruption in the.
Both state taxes and.
Local taxes, probably sometime in the next 12 months. So I would expect that these the bailout package is sort of the relief packages would.
Focusing on that need because I think.
People understand the schools are our future.
Kids need education, they're getting.
They're not getting it right now.
To this will become a major focus for our coal Society I believe.
The next.
18 month, so I think your your guess I'm not one.
I would second guess, who say, yes, we will there will be some form of stimulus from the federal government and the disc to state and local districts.
Okay. That's good luck guys.
Thank you so much drew thanks.
Thank you.
Thank you I'm showing no further questions at this time I'd like to turn the conference back over to Mr. Robinson for any closing remarks.
Well. Thank you for listening tour third quarter to quarter call and of course are focused on the impact of school closings on scholastic and how were overcoming the challenges in mitigating the revenue picture.
We're looking forward to talking with you again.
In July when we had our yearend.
Meantime, thank you very much for joining us. This afternoon I Trust that you. Your colleagues in your families are all safe and well and we will stay that way and the thank you for the support you've shown to scholastic.
In these difficult times, but we know that we're going to prevail and all well get our society back together again and overcome this this temporary problem.
Thank you all.
And could good day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you participating you may all disconnect.
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