Q1 2020 Earnings Call
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Hi, Scott just first quarter earnings call.
At this time, all participants Oh listen only mode.
After the speakers presentation, there will be a question answer session.
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Nike hand, the call over to Brian Chip.
And 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 on the Investor Relations section of our website at HMH CEO Dot com.
A replay of today's call will be available until may 16th 2020.
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A webcast will be available on our website for one year.
Our 10-Q was also filed earlier this morning, along with our first quarter 2020, <unk> 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.
In senior leadership salary reduction.
And for the majority of Huh.
A four day work me.
Associated labor cost reduction.
A freeze on spending.
Not directly tied to near term bills reduce inventory purchasing.
Throw of long term capital projects not directly contributed to buildings in 2020.
Borrowing from our our <unk> our assets that credits at 40.
Preempted mess to mitigate against capital market disruptions.
Third for customers that pandemic has played h. and H.C. important role of trusting part.
It is vital force or they're teaching and learning resources.
We put in place comprehensive support efforts for educators students in school districts navigating the challenge of closures due to the Cobra Nike pandemic, including three resources for educators.
And their parents.
And we've seen significant uptake in response.
If I met through our digital platforms, Ed and drove dramatic.
Technical support calls from customers have blow Oh 500 per cent.
Weapon or a virtual teach it had in record number 10 d.
Fourth.
And immediate term, we see back to school driving market demand as administrators plan for the return of students to school.
Whether that be a continuation of remote virtual learning or back to school in the traditional.
In either case instructional materials are a must have to advance student learning.
As you know from June two September is the period, where we generate the lion's share of our feelings every year.
And we still anticipate the damp will be the case.
2020.
Yeah.
Fifth.
The pandemic has accelerated the market and digital wording.
Access the digital learning resources is crucial with <unk>.
What was once a nice to have.
Is now a must have.
Teachers are holding the virtual classes from their kitchen table.
Using technology such as do.
And assigning work using h. and H. a digital platforms.
<unk> users digital solution, we believe that teachers will be reluctant to go back to print instructional materials once they return to the classroom.
Likewise, where the ratio of students to computing devices with wants to one.
We are seeing it now shift rapidly one to one.
The priority school districts are signing marrow digital infrastructure.
Every student with your own device as district increasingly purchase home books and I pad.
Bridge the digital divide.
Taken together did all me that you look posted them.
H made floating were stronger.
Digital for disconnected awesome.
In which the digital media will become the central delivery mechanism.
Affording a new opportunity to power teachers.
And break together all members of the learning community.
Today are digital platforms already do that all of the essential services required for the new reality.
Of teaching and learning.
Instruction.
Computer adaptive reception.
And student performance.
Professional development, which will be delivered <unk>, even after school reopened and artificial intelligence driven programs, which will support ongoing practice.
Innovation and intervention.
Products and services that reside on or classical will create the connector off line.
And while prick for me as an add on the option.
This is still need to need to keep it.
This crisis is troubling in many ways.
But what has really $90 h. and h. across our organization.
These are under wavering commitment support to supporting the crisis response.
Stabilization and recovery efforts of our customers with connected learning solutions, they're effective engaging in equitable.
I am tremendously proud of our over 3000 recalling.
We've had to work differently. They brought their same dedication and try to their jobs, each and every day life in fear.
Effects.
Goes out to them.
Now would that context in mind.
Moved.
First quarter results.
Our performances tracking inline versus actual expectation until mid March.
<unk>, our buildings became impacted by school closures in disrupted purchase.
C activity.
Just to give you a sentence.
Of how they have played out.
Marked for zero schools were closed just two weeks later by Mark 16.
Approximately half of schools nationwide workloads.
Yeah, a little over a week later on March 26.
Roughly 90% of schools were holes.
Despite the challenging market environment, H. makes delivered solid performance and she'd get progress in our seasonally small score.
Just a few highlights.
In our education.
Our core solution to offer to later grow up 3% acute war.
This was driven by sort of fellow from for me in the 10, the Texas literature adoption.
We're very pleased H.M.H. has a beating share with about 75% of the market decisions made.
In California.
Or science adoption remains out of try.
Additionally, we're very excited about one district level approval in science to Los Angeles Unified School District, which is the second largest school district in the country, we're already receiving orders and expects fall performance.
This telling successful drive <unk> in later quarters.
We also had thought of boating drilling Q. war shipwrecked away at the quarter in due to school closures.
And with our faces offerings, we delivered solid supplemental intervention performance.
Is that alluded to earlier, we also experienced significant growth in the digital usage of her online at platform.
I guess that market backdrop, let's move to the numbers.
Our overall education, bill rates were $93 million into one down 20% a year over year.
Course solution billing is I just mentioned were up three per set you up to 22.
This growth was driven by a strong performance in Texas and continued progress with other key adoption include in California.
Extension buildings were $70 million for the court.
Mental intervention delivered solid performance. Despite shippings awaits however, I am in face it tough comparison to the same period and 20 million to.
What's what's compounded by shipping delayed due to warehouse boardrooms.
AD for professional services eat offering have also been impacted by corporate another team that said we are pleased.
Dragging shifted Brookfield delivery is proving timely.
No already converted 20 per cent of our professional service engagements <unk> delivery, which is a higher margin mild compared to our legacy face to face off.
And you heard me say at the beginning of this call. This pandemic has accelerated the moved to digital.
H matrices, well conditioned capitalized on this shift having advanced sorry, Oh digital transmission.
A few examples.
We've grown our staff based extensions is dramatically by 76% for March 2019 March 2020.
Are Ed platform usage is accelerating with 314% growth.
It's March 2019.
We continue to add to our list across so for extension wins.
Are poor solution footprint.
Expand into extension and capture a breeder share of the $276 per student spend each year.
Did cross L. wins in Los Angeles, Omaha, Indianapolis, Fairfax County, Pasadena, Texas are just a few examples of how we're leveraging our go to market scale it portfolio bread.
And as we've shared with you last quarter, our newest ask based programs are winning best in show ticking warming industry Awards, which are important industry validation of our new A.I. driven programs. That's recently a mere okay liable or.
<unk> finalists for the company Cody words, you know soon.
Oh this is said.
As our customers shades, perhaps the most significant disruption to teaching and learning in their lifetime.
We as the learning company or best positioned to solve their challenges and capture new market demands put in another way.
Our status as a trusted Harper to schools teachers and students is more crucial than ever.
Regardless of the physical or verbal setting after school.
Stepping back.
What are those reality educational out now and how can h. and H. Hell.
First learning loss.
As a result of the disruption to their education.
Ones are expected to areas a learning lost 50 to 70 per cent.
According to researchers in northwest Evaluation Association.
For H.M.H.
That means measuring loss at the start of the next school year without computer adaptive this testing.
April will be especially important this coming year.
Next the learning gap.
Students that were already behind coming into the pandemic will now be even further.
As a result, our intervention it after practice solutions will play an important role for a larger portion of the student population.
Third equity for all students.
As coping 19 gave rise from <unk> burning it brought into focus a major inequity.
12 million students nationally.
They'll have no internet access at home.
School districts are focused on solving that problem now.
Places greater emphasis on or digital platform in on another high quality digital resources.
And finally teacher professional liberty.
Only digital where it is here to stay.
But we did that come you found tools and technologies and maybe teachers are still under prepared.
So we stand ready to help with our online professional routine solutions.
What is the biggest new reality for students and teachers isn't it celebrated shift to the virtual classroom.
We know that for a variety of reasons. Many k. 12 school districts have been floating moved to want want digital Gandhi.
Well what is it fundamentally clear is that this pandemic will be a tipping point.
District at all grade levels Elementary Middle School and high schools are increasingly facing new one quantum computing real for their students.
Yeah, we're seeing a number of other key indicators and increase in wife on a hot spots for students to increasing use it all like curriculum in lessons.
This is not just for students teachers to increasingly will be learning virtually would demand for all my professional development and digital infrastructure rising as well.
But that's another way, we haven't seen a shift over the years.
It gradually 50 digital.
Our business model has all warden.
From the two thousands.
You had print programs in digital at least helpful.
It's really bad for the last decade in a blended print digital environment and now where we are building a new connected decade.
Education companies will be expected <unk>.
Truly put digital first would print only available and yeah.
And the good news is we are already supporting many of our customers have this font as they grappled do digital first environment.
Since school closures began we've been focused on supporting customers with flexible curriculum access and virtual professional development from the <unk>.
Expanded technical.
From a support resources used to the 800, driven Hearst, while learning platforms, such as waggle liable in Europe.
<unk> daily activities and murdered cat built like H. mates worry architects and curated asshole activities <unk>.
Expert targeted support for superintendent.
All of this well we continue to host millions of students and teachers accessing H.U.H. curriculum on our digital platforms.
So then for education.
Now, let's move on books and media.
Building for the quarter were $39 million.
This is a very solid result for this segment or business given that all bricks and mortar book stores close in March.
However, with family staying at home, we experienced increase demand in children's nonfiction.
The typically workbooks as well as E. books, and the result, we delivered strong growth at Amazon of 25%.
Particularly strong rotate e. books, the younger leaders category, which prove 59% in the first or.
We also have five tires I'm in New York Times bestseller lists showing the walls.
Last book on the left.
Little bit of truck.
Long walk toward and the crossover.
We also launch to watch and awhile.
They look for the Star podcast, guys in Mindy, Thomas which would be integrated into H. natured cage for all signs programs.
In rapid response to the World wide school closures to come that some of worrying loss.
Finally.
Also in the interest of addressing some of the learning walls. We are playing three we introduce several popular workbook titles pre k. through five break.
Would that elected him to call her job.
Thank you Jack and good morning, everyone. Thanks for joining us on the call and I hope you're all staying healthy unsafe during this unprecedented done.
In terms of our first quarter as you all know it is seasonally are smaller.
And until mid March business had been training in line with our expectations for the corridor.
However, one school closings became widespread due to the pandemic.
We experienced they significant disruption in operational activity from our customers.
This is affected purchase decision, making which was in many cases delayed.
As well as our customers ability to receive shipments from us for purchases they had already made.
This trip in school employees transition to a work from home environment.
This latter effect impacted her ability to build our customers on a normal timetable.
But when you've been clearing that backlog through the month of April and then to make as many customers have made arrangements to receive shipments.
So that context than mine, let's take a look at the highlights the score.
I can totally the net sales were bound 2% to $190 million in the first quarter compared to the same period.
A year ago.
Billings between defined isn't that sales adjusted for the net changing deferred revenue work down 15% to $131 million.
Net loss from the first quarter was 346 million.
An unfavorable change of $229 million compared to the same period in 2019.
We took any 262 million dollar impairment charge for goodwill in the corridor, which was the primary driver of the unfavorable change.
This impairment charge, there's a direct result of the adverse impact, but the covert 19 pandemic has had on the market price of our common stock.
The impairment charge was partially offset by a decrease in selling an administrative costs, resulting from our cost reduction actions undertaken in the fall.
As part of our 2000 maintain restructuring plan.
In our mitigating steps this year to reduce discretionary expenses in light of the coven 19 pandemic.
As well as lower cost the sales.
Adjust the name adopt for the first quarter improved by $9 million compared to the same period last year, we loss of $17 million. Despite the decline in that sales.
Improvement was the result of our reduce selling an administrative expenses.
Or free cash flow of the usage of $187 million compared to a usage of 212 million during the same period last year.
The lower caste usage.
In the first quarter was due to improvements in working capital driven by higher cats collections and lower inventory purchases along with reductions in capital expenditures.
Total capital expenditures were $31 million from a quarter compared to 36 million in the same period last year.
Moving on to already here today segment result.
Education buildings were down 20% the $92 million in the first quarter.
Within the Education segment course solutions buildings group, 3% $22 million for the corridor.
Delivering strong selling performance in the Texas literature adoption.
With approximately 75% of the market beside it.
Consistent with our experience in the text reading adoption last year.
We expect the selling performance will translate into buildings in our second and third corridors.
Also within the education segment.
Buildings for our extensions offerings declined 25% $70 million for the first quarter.
Or supplements on intervention solutions I had a solid quarter, but this was offset by having them in which pays very difficult comparisons from a strong performance in 2019.
Hi name and also experience several shipping delays due to nationwide school closings, which affected his performance at the end of March.
H.M.M.'s books and media segment buildings.
3% the $39 million for the first quarter.
This was due to 2019 licensing revenue attributed to the Carmen San Diego series on Netflix, which did not repeat in the first order of 2020.
But is expected later in the year, partially offset by strong growth and online book sales, particularly in the young readers evokes category.
I Wonder what now shift gears from our performance in the season, only small first quarter to spend a few minutes putting in the context. The decisive steps we have to take him to strengthen our financial position enlighten the covert 19 pandemic and ensuing business ructions.
As well as to provide you with some additional color about our financial condition and expectations.
In October 2019, as you remember.
You know steps to further simplify our organization.
Realigning, our costs base, and reducing or capital intensity to becoming leaner and more cash degenerative business.
We also strengthened our balance sheet through debt reduction in the refinancing to extend our debt maturities.
Since then we've taken several additional actions to protect the financial help from the company and enable us to whether the coding 19 crisis and emerge stronger thereafter.
These actions announced on March 27th included a significant reduction of operating expenses and enhancements the H. Amazes biology.
We reduce pay for the majority of employees fro spending not directly tied near term buildings.
Induced inventory purchasing.
Temporarily closed fulfillment centers.
The first capital projects and preemptively borrowed funds from or asset backed revolving credit facility typically access during their working capital trough in the second quarter each year.
These were all prudent measures strengthen our financial position in light of the uncertainty posed by the unprecedented steps taken by our customers.
Representing over 90% of schools in the United States to transition to a remote learning environment.
We have conducted stress testing scenario planning and have concluded.
That if we take no additional action will be on the actions that we announced on March 27th.
We estimate that our break even level of buildings that is the point at which we would generate no free tangible and 2020.
Isn't a range of 1.232 $1.28 billion.
By way of comparison.
2017 in 2018, H.M.H. generated over $1.3 billion in billings, a much higher level than the scenario analysis shows yet the company consumed 82 million and $73 million of cash in those years respectively.
To be clear this break even billing scenario range does not constitute billings guidance on our part and does not represent the buildings outcome, we are striving for and 2020.
But we are sharing this with you today to quantify the significant improvement in cash one generation capability that resulted from our restructuring actions in 2019.
Along with the additional mitigating actions we announced in March.
Looking ahead, we expect and our planning for it and recovered in the summer as our customers prepare for returning to school this fall weather in physical classrooms or virtual classrooms.
We have already seen signed the man recovery is beginning.
Jack mentioned, an important science adoption when in the Los Angeles Unified School District.
And wins in the Texas literature adoption.
These decisions were made after the wave of school shut down had already begun.
The second and third quarter to are typically the busiest buildings quarters for us and now that we have entered into this important part of our here. We are learning more every day about the magnitude of the recovery in demand.
Now moving on from liquidity.
As you know, we typically start each year with significant liquidity to fund the seasonal working capital needs of our business under a range of different scenarios.
2020 is no exception.
We end in 2019 with $296 million in cash in our 250 million dollar asset back revolving credit facility was on drawn.
During each of the last two years.
We drew liquidity from our asset back revolving credit facility and put it back in a matter of months.
For 2020, we had already anticipated doing the same.
And at the potential impact of the pandemic became apparent.
We decided that preemptively drawing won $150 million was a prudent stuff to mitigate unforeseen dislocations in the capital markets that might prevent us from accessing our credit line later in the year.
We ended Q1 with $255 million on cash on our metallurgy and excluding the cash from borrowing $150 million of our revolver, we had $105 million of operating cash on hand.
$21 million more operating cash and we had at the same point last year.
So we believe we are entering into the second quarter of 2020 with ample liquidity.
And financial flexibility to manage our business through the normal seasonal working capital cycle that we managed to every year and importantly to capitalize on the longer term opportunities the Jack spoke to.
What's that.
Well no turn it back over to Jack for some closing remarks.
That's yeah.
In closing.
I like to summarize the key points to cover today.
First H.M.H. is in eight strong position or make capital liquidity and balance sheet perspective, and we made confident in our long term strategic direction.
And if you own a goal shared with you all the work we've accomplished over the last two years, including the decisive action taken this year.
H.M.H.T. <unk> leaner and more profitable company.
We are meeting the market in Texas, again, and I perform well in early sales efforts across the other adoption opportunity this year.
We are confident this momentum.
Continue into our business selling season in coming months.
With schools planning for the fall, we continue to fix that back to school to be meaningful demeanor driver, but instructional materials market. This summer.
And finally.
Depend damn it is accelerating the market mood <unk>.
Digital offerings will be in the next decade.
H.M.H.C. best position across both core in extension would they connected solution.
It is under 10 by Smart software and puts the educator at the center.
No other companies.
Industry can match.
Would that we'd like to open up the call for question.
Operator.
As a reminder to ask a question you would need to press star one and your telephone.
Try your question press the pound key.
I think them by why the composite q. and a roster.
I first question comes from Bill Warmington, a month Fargo airline is open.
Good morning, everyone.
<unk>.
So.
I think it'd be helpful. If you could walk us through specifically how the the moved to digital is going to help <unk> and how that's going to flow through you think the buildings and out what kind of a timetable.
[noise] Yeah, Great question Bill I think you know the first thing to say is that we have moved to digital.
We had been for the last 10 years and the industry has been in this blended environment.
Where you provide core curriculum or even supplemental and there's an analog piece to it that's manifested in a <unk> book and there's a digital piece of it.
So when we talk about digital first what we're talking about is digital is the main event, that's what's going to be consumed, especially as every kid in that country has access to a chrome work or or a I pad and that's what the crisis or does it was really excel.
Paraded that move from two to one two kids to every device to one to one.
So that's a big driver for our digital.
Instructional materials and so.
The billings, we see we'll be essentially digital.
Then you know educators will determine what do I need.
Imprinted materials as a supplement to the digital whereas up till now.
You would buy it core program and you get the digital in the pit material, even if you that new independent tells you still get them.
So we don't see a significant change in the pipeline. However, you can imagine that the gross margin will improve.
As you know as we reduce our reliance on the manufacturing up couldn't materials in natural production print materials and and distribution print material. So we see you know and lift in the gross margin and ultimately and you were born profitability the company.
[noise] grounded.
Then I think yeah, I know, you're you're you guys are not giving guidance going into the the fall you provide some color.
In terms of what you think could happen.
And I thought it might be helpful. If you could.
Strokes give us a sense for.
What buildings might look like on there are some different recovery scenario.
You know as as high level as you like but I think that that you know sort of laid out where you thought the break even was which is helpful.
And I know you can't predict when the school day six are going to open.
But I think you can lay out like this happens then we think we're probably going to come in around here.
That'd be helpful I think.
Yeah, that's true yeah, yeah. It's it we're not yeah at the point, where we're able to make the you know reasonable estimate on where you know we think this ultimately can play out but.
As I said in in the remarks, there during the call that you know we we certainly are not viewing that break even billings level as level to which you know we are aspiring this year.
Back to school 2020 in the fall is going to be a major demand driver as it is each and every year. That's that's what we believe and that's what we're preparing for.
And as we think about where we're at right now what really focused on that is making sure that we're.
Supporting our customers need and they're transitioning to a new environment.
And supporting the way, they're thinking about how to how to return to school in the fall, whether that's an a. physical classroom setting or virtual classroom setting we have offerings. Therefore, the opportunity for buildings.
Across a really any situation that that we can foresee coming through the next year. So we're not quite ready to provide estimates on where we might end up but we do think that back to school is going to be important demand driver.
Yeah.
I also wanted to say <unk> congratulations on the California signed twin that that's a great <unk> right <unk>.
I I want to ask if when when you expect there could be a resumption of of decisions around California science.
Yeah, I think alright, well, we'd seen a resumption. So you know in Texas for the literature adoption as well as California, we other adoption states.
There's there's been a result resumption, if you already purchasing behavior.
Right.
Alright, well, thank you very much for the color.
Right.
As a reminder, like to ask a question. Please but star then one.
There are no further questions like turn the call back over to Jacqueline Nicholas Walmart.
Okay, well. Thank you everyone for your time in your attention today.
And we look forward to talking to you again.
The key to on this call have a great that.
Yeah.
Ladies and gentlemen, the school 'cause today's conference call, making purposes spending you may now disconnect everyone have a great that.
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