Q1 2021 Scholastic Corp Earnings Call
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I'd now like to hand, the conference over to your host Patrick ILEC off Senior Vice President Treasurer, and head of Investor Relations. Please go ahead Sir.
Thank you Liz and good afternoon, everyone welcome to scholastic fiscal Twentytwenty, one first quarter earnings call. Joining me on the call today are Dick Robinson, our chairman, President and Chief Executive Officer, and Ken Cleary, The company's Chief Financial Officer, we have.
We have posted an investor presentation on our IR website, and investor Dot Scholastic Dot com, which we encourage you to download if you have not already done so.
[music] I would like to point out that certain statements made today will be forward looking such forward looking statements are subject to various risks and uncertainties, including those are rising from the continuing impact of covert 19 on the company's business operations.
These forward looking statements by their nature are uncertain and actual results may differ materially from those currently anticipated.
In addition, we will be discussing some non-GAAP financial measures as defined in regulation G. and the 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 and to review 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 Dick Robinson.
Good afternoon, everybody and thank you for joining our call as you all know from your own lives or from the news [laughter].
It was a difficult time for U.S. schools, which are grappling with how best to keep their teachers students and communities safe well also implementing new ways to schedule, an organized learning Korea rigorous dispensing and sanitation methods and supporting families were navigating this new normal with the most.
Schools delayed openings this academic year, and well someone who started with fully remote learning models that many others, who started in person sessions were hybrid schedules. During this time of readjustment of teachers are beginning to send in.
Send in book club orders in schools are just now able to schedule book fairs.
We remain intently focused on both managing the effective cobot 19 on her business and supporting or a school and family customers as the acclimated to their new environment in three important ways.
First we have substantially completed over $100 million cost reduction program.
And our transition to a more flexible operating model.
Clearly will cover the program and in detail, but I'll touch on the key initiatives.
We took immediate action in March to reduce costs, while also developing a comprehensive program to mitigate the impact of the pandemic on our operating income and cash flow to stay.
To strengthen our businesses and position scholastic for growth in the years to come.
This program reduces the seasonal operating loss this quarter by 38.1 million, excluding one time items and meaningfully lowered free cash use in the quarter.
The first quarter, most reductions related to labor, resulting in a one time pretax severance charge of 12 million.
Weve streamlined all of our U.S. units, and particularly our club and fear organizations significantly reducing head count and improving efficiency as part of these cost folks focus <unk> measures, we sold or underutilized Danbury, Connecticut facility and we continue to pursue other cost saving.
Actions.
In response to the changing circumstances.
Over a school customers this.
This program is designed to enable us to reach our goals of preserving profitability and positioning ourselves to ramp operations official efficiently as demand increases during the year longer term, we believe that our efforts will proves glass to draw operating leverage streamline financial processes and significantly lower.
Cost base.
At the same time, we're positioning the parts of our business that are less sensitive to global trade and education.
For continued success for the rest of the year and beyond we're proud of our strong front list one portfolio of popular IP and we accelerated our work to deepen our digital connections with our customers covert 19 as fast track to do digital evolution that was already underway and our blended the traditional digital solutions.
Allows us to meet customer current needs and anticipate how to best solve challenges.
Third we're flexing the makeup of our products and services and the timing of delivery to meet customers, where they are because of our transition to more flexible model, we're able to match or offering and therefore costs with ER or best revenue potential for example, we're now giving parents and schools the choice of shipping.
Club and fair orders to homes as well as those <unk> those as well as schools as many of you have requested we've already seen a strong response.
Oh, two home shipments from parents ordering from book clubs.
Preschools operating in a tradition in person manner.
We are beginning to schedule in person fears for delivery later this fall.
For schools that up for online fears weird.
We are enhancing our model to improve revenue per virtual fear.
With the new animated promotion a web site the directed to virtually two parent show customers ordering from home.
Teachers and administrators are quickly settling into their new environments, and we are beginning to see momentum now.
Now turning to Q1 performance in more detail largely.
Largely as a result of the challenges presented by Cobot 19, Scholastic first quarter revenue of $215.2 million was 7% lower than Q1 of last year, excluding onetime items. The operating loss in the first quarter was 45 million a 46% improvement from the prior year's operating loss.
33.1 million also excluding one time items due to our aggressive actions to reduce costs and transition to a more flexible and responsive model to meet new need some schools and classrooms.
[noise] [noise] and trade in the first quarter, our strong sales continued with the Bellerive song songbirds, and snakes, which as you know is hunger games number for staying strong on bestseller list throughout the summer the baby Sitters club graphics, Captain Underpants, the bad guys and that.
Enough series, all performed very well as did you should see me in a crown by bestselling author, Lisa Johnson, which is the first young adult novel picked by Reese Witherspoon Book Club.
We're also seeing more and more parents turns were workbooks for early learners. They poke use dog man Greiman punishment. The ninth book in the series launched on September one just as we entered the second quarter.
This is a critically acclaimed book remains the number one best selling book overall in the U.S., Australia in Canada over the past several weeks.
And as top every bestseller list, we were thrilled with this performance, which was exceptional in a busy summer publishing season. We're planning also for the important November release of JK rulings person children's book in 13 years.
Colby if kebab along with other exciting.
Exciting new releases.
We're also gaining more traction for our entertainment unit based on strong demand for our characters that IP with recent development deals for live action feature films of Caster Goosebumps, Adam works and the Magic School bus sales.
Famous scholastic brands. These media deals will help to engage a new generation of fans and also pay off in a back loose backlist boost marketing opportunities in our school channels and international sales lift.
Fares.
And turning to clubs and fairs, what we're seeing this academic year, so far as the teachers and administrators are focused on getting there in person in remote classrooms up and running and helping students and families settled into new routines and this has slowed down fears bookings. We had we had we had anticipated a lower fare count this fall.
Due to the delayed openings and we expect the pace of club and fair activity to increase towards the end of the second quarter and in the second half of the year we.
We know the schools are motivated to host fares, which are crucial fundraisers for the schools and give kids the sense of normalcy that they miss and we've converted many physical fares to or virtual online model and we are working with schools to schedule safe and easy physical fears that solve for space time and people limitations.
These can be set up by the hallways or outdoors and are easy to move from one location to another and all of the all fares offer an online extension we're all.
We're also offering drive through options in certain districts as well as our full fare model with a strict safety precautions in place.
We're seeing interest in our new shippable fare option and we are ready to scale up the schools become ready to schedule physical affairs as schools across the country and implement an adjust their learning models to accommodate local infection rates in their area or school, we can provide solutions that fit each school's individual needs.
Yes.
Similarly in our clubs business. We are currently seeing significant engagement from teachers and higher revenue per event, but we're currently lagging in orders from teachers as a result of delayed openings and changes to their classroom environments. However across the board we're hearing the teachers students and families.
Books, and they want the kind of engaging entertaining books that they can get from us at our clubs, we were bringing cost down by reducing SK use and encouraging migration to our digital platform will also efficiently distributing reimagine Flyers that are designed to help teachers spark discussion.
Each understanding and tolerance and engage young readers teachers appeared to be about three weeks behind normal ordering patterns. So we expect that order volume will increase over the next several weeks that will not catch up fully during the quarter to last year's pace.
In our education business, our transition to digital is gaining traction that we expect to pay long term dividends for our company and we expect digital education programs to be an essential part of classroom instruction long after the pet pandemic is behind us.
We are in a strong position as schools trusted professional learning partner and our summer programs performed well across the segment as we were able to provide digital print or blended solutions, we're continuing to strengthen our digital platforms as our programs become part of the school curriculum, which are the bedrock of modern.
Distribution models and digital subscription billings showed promising 15% growth in first quarter.
As is typical for digital and subscription revenue streams, we're seeing a higher steady volume of smaller trial transactions for a digital components.
Schools look to us to help keep kids engaged and fight against the summers slide.
With offerings like or take home grab and go reading packs, which are ordered by schools for delivery by us to children's homes, we transformed our lives scholastic lit capped.
At home to digital in time for the summer in New York City used it for its summer program for kids the digital reading program it.
Programs have resonated right away because we're offering the books kids want to read from authors they love and recognize we.
We had new engagement for scholastic first and literacy pro our digital independent reading tool.
Through a district wide order from Ella U.S.D., serving most of the population kids in schools in Los Angeles.
We are encouraged by the response to engagement with our innovative and award winning digital literacy program, such as scholastic first and word as well as digital companions to our classroom magazines and our recent lead launch digital only classroom magazine subscription, which is very popular popular and has generated new.
Sales for the education segment.
To pair with successful club platforms like or scholastic learned at home hub.
We have launched new initiatives like sales.
Like scholastic bookshelf on Instagram.
Which gives parents and teachers free access excerpts from over 60 scholastic stories accessible with a few simple swipes.
In our international business.
We are seeing some similar trends as in the U.S. lower book their volumes, particularly close by is primarily caused by school closings and also in Australia, Canada, and the UK and lower direct sales in Asia were partially offset by stronger trade publishing globally and strong booklet performance in Australia profit.
<unk> grew substantially in the quarter for international.
Looking ahead, we continue to believe we will improve scholastic is operating results in the second half of our fiscal year, but because of the continued uncertainty surrounding the impact of coated given the delayed school openings and new methods of scheduling and organizing learning, we will not be providing an outlook for fiscal year 2021.
As noted we expect club and fair sales to increase toward the end of the second fiscal quarter and to continue to strengthen in the second half of the year.
We have not only completed our 100 million dollar cost program that we're taking additional action to lower cost and be more efficient and this will continue to be a key focus of the company. We are also supporting our revenue streams by cementing our position as a trusted partner to our customers providing a wide wide.
And your best selling books best in class solutions in the form of flexible school distribution channel solutions and edging engaging digital education platforms and literacy solutions. This is the essence of our work to nourish and support kids as well as their teachers and parents and schools on their personal learning.
Journeys through the year.
As more than 55 million children returned to a mixture of in person hybrid and remote classrooms across the country learning models and school needs vary from school to school District to district. The one thing that has not wavered. In this challenging time is our dedication to helping children learn and grow and our ability to deliver value.
Tour, a school teacher parent and child customers.
This dedication has driven most everyday for the past century and will continue to drive us forward for years to come with that I will turn the call over to Ken Cleary, Our Chief Financial Officer.
Thank you Dick and good afternoon, everyone today.
Today, I will refer to our adjusted results for the first quarter, excluding onetime items unless otherwise indicated.
First quarter revenue was $215.2 million, a decrease of 7% compared to $232.6 million last year, driven by lower sales in our school distribution channels to delay in school openings.
The time, you, Dave Pillowcase, New Dog Man book, which was released on September Onest of this year and will benefit our second quarter also affected our year over year comparison.
Last year's Dog man for whom the ball Rolls and this year's dog man grime and punishment. Both went on sale the Tuesday before labor day, which fell in August or Q1 in calendar 2019, and September where the second quarter in 2020.
As Dick said, our trade and education businesses are less impacted by the cold related disruptions, we had strong trade sales, including audio book sales and improved results across our education business for digital product subscriptions teaching resources summer literacy camps in submarine programs, which helped to partially.
To offset the revenue declines in clubs and fairs.
Operating loss in the first quarter was $45 million, a $38.1 million or 46% improvement.
$83.1 million last year, adjusted EBITDA was a loss of $15.9 million compared to a loss of $61 million in the first quarter of 2020 and improvement of $45.1 million.
Net loss for the current period was $30.9 million compared to a net loss in the prior year period of $55.4 million we.
We realized a non operating gain of $6.6 million in the first quarter from the sale of our underutilized Danbury, Connecticut facility.
Loss per diluted share was 90 cents compared to a $1.59 last year.
Turning now to cash we traditionally have high free cash use in the first fiscal quarter. When schools are closed and we are procuring inventory, making other preparations for the back to school selling season, which.
We continue to carefully manage our cash use including executing our labor cost savings program restricting non essential spending reducing inventory purchases to match expected sales volumes and implementing our new procurement model designed to drive more accurate orders, which are placed close to the timing of customer demand as.
As a result of our successful cost savings initiatives and cash preservation efforts net cash used in operating activities was $26 million compared to $97.6 million last year.
Free cash use was $34.9 million compared to $118.5 million last year at the end of the quarter cash and cash equivalents exceeded total debt by $135.6 million compared to $186.4 million a year ago.
Capital expenditures in the first quarter was $60 million, just slightly higher than depreciation amortization, we realized net proceeds of $12.3 million from the Danbury facility sale and we distributed $5.1 million in dividends in the first fiscal quarter.
Our balance sheet is solid and our working capital management and access to liquidity remained strong.
We have $175 million available under our existing credit facility. In addition to the cash and equivalents on hand at quarter end we.
We will continue to assess funding needs in the context of evolving information on school Reopenings and banking market conditions.
Turning now to our segment results in children's book publishing and distribution first quarter revenues decreased 17% to $90.9 million, primarily in our school club and fair channels. As a result, the delayed school reopenings and other covered related disruptions.
Much of our cost savings initiatives were achieved in operations supporting our school channels.
We had excellent trade frontlist sales in Q1, our scholastic early learners workbooks and Bob books lines were also very popular with parents look for materials for the kids learning at home so.
Segment operating loss improved by $12.5 million compared to last year as a result of the aggressive actions taken to effectively match labor and operating costs to near term revenue opportunities and the temporary closure of fair distribution facilities.
In education segment revenue was $53.6 million, an 11% increase over last year driven by sales of our core instruction programs such as summer, let camping after the bell and our grab and go summer reading packs did it.
Digital revenues increased significantly driven by successful moves to deepen digital connections and offer schools the digital solutions they need in a remote learning environment.
We also had higher volume sales across our teaching resource business, including our first little readers packs and teaching guides jumbo on summer express activity books, and teachable lesson plans and activity sheets, where we increased our subscriber base by 21% over last year.
Segment operating loss was $2.2 million and $11.2 million improvement over last year's loss of $13.4 million as a result of our strong revenues and effective cost savings measures.
In international first quarter revenues were $70.7 million down 5% compared to last year as a result of lower book fairs volumes in Canada, Australia, and UK due to school closings as well as lower direct sales in Asia.
These declines were partially offset by stronger trade publishing globally and good performance for book clubs in Australia.
Many of our international operations in Australia, and Asia are beginning to see increased activity as the pandemic has eased in these regions.
Operating income of $6.2 million was a 9.9 million dollar improvement over the prior year period due to our cost containment measures largely in labor and operations costs.
Our cross functional covert task for us substantially completed work to achieve $100 million in cost savings. This year as you can see from this quarter's results.
We took action to streamline improved procurement rationalize our inventory purchases, we consolidated our book fairs distribution function may difficult staffing decisions that reduced our workforce, including the temporary closure of our distribution facilities and the elimination of redundant functions.
We have focused our book fair sales team on activities Dean critical to our customers, while deemphasizing low value add activities.
We have streamlined our book clubs distribution function to achieve greater efficiencies and lower costs.
We have consolidated certain corporate functions and permanently reduce costs as a result, we.
We have halted all travel and entertainment spend and our more recent technology investments are enabling us to work effectively while many of our employees work remotely.
We have identified areas of additional cost savings that we will continue to pursue throughout the fiscal year.
Our program to reduce costs and mitigate the impact of lower Cobra related sales helped to reduce our selling general administrative expenses by $41.5 million in the current quarter compared to the first fiscal quarter last year, excluding onetime items.
A substantial portion of these costs are permanent and will not returns the pandemic eases.
The lower overhead expense was primarily due to lower labor expenses and operational savings across multiple cost centers as well as lower technology related spend in the current quarter are low.
Our labor reductions and restructuring programs resulted in onetime pretax severance charge of $12 million this quarter, including $11 million in overhead.
Looking ahead, we are not relying on our focus on our goals are preserving profitability and maintain liquidity because we know we face a tough second quarter in our school channels, while teachers and students adjust to new schedules and therefore us voters to sponsor clubs and hosts fares as the school year begins when teachers and book Fair Horse a rate order scholastic will.
Meet their needs, including virtual fares better digital tools to engage students and parents and more flexible distribution methods such as ship to home options.
Our outlook for trade and education businesses remain positive and we have robust front list of best selling series and author scheduled for release over the course of the fiscal year and our digital education programs are steadily gaining traction as we were able to provide schools. The blended learning solutions they need for students in the classroom and at home.
Additionally, we have broaden the usage of our magazines by offering digital only subscriptions for schools that prefer online learning.
As administrators teachers parents and students become more acclimated to operating in their new learning models teachers and parents will continue to seek books and other educational resources for their children, which will support learning both in school and at home we have.
We have new offerings to meet the needs of this new environment like virtual fares, which provide panoramic walk throughs of our top selling books and collections and connect seamlessly to our online fair point of sale.
Additionally, many schools, who are resuming traditional in person learning are asking for the impressive book fare options that they expect from scholastic and we have a variety of formats to offer them.
As more people resumed his favorite choices, we expect improved results for the second half of our fiscal year, but we're not providing financial outlook for this fiscal year.
As we look ahead, we remain focused discipline and driven to reduce costs, while we navigate this to disruptive period.
Carefully monitoring the data on a daily basis, especially in the crucial second quarter and we continue to leverage this period to reduce our costs in near term longer term, we believe that our efforts to streamline processes and implement a more flexible operating platform will improve operating leverage and lower relative cost base, which will provide long term benefits to our company.
And customers.
And with that I'll hand, the call back to Gil for the Q and a session.
Thanks, so much can raise if you're worried we are now ready to open the lines for questions.
As a reminder, ladies and gentlemen, if you would like to ask a question at this time that's star then one.
The question from the line of drew Crum with Stifel. Your line is now open.
Okay. Thanks, Hey, guys. Good afternoon, so you've given us a sense as to what the shape of fiscal Q Q should look like for clubs and fairs.
As we think about the second half your comment that you should see increasing demand as you progress through the period understanding you're not providing guidance at this point, but directionally should or could clubs and fairs grow year on year in the second half.
I think it's a little too soon for us to really know that in detail the drew.
Obviously, we think about it and we have.
We think about the pace of which schools are coming back to fares and sponsoring clubs.
And given the way they are adjusting to the what's going on in schools, it's taking them a little longer to organize themselves to you.
Avail themselves of the services and they are we're changing the nature of what they order there is it.
Great interest in the virtual online fares.
As other schools have come back and want to sponsor in person fair. So we are.
We believe that the the second quarter will will be of the day.
The difficult one with lower revenues clearly than in the prior year, where we had an excellent second quarter, particularly in fares.
But the second half of the year, we should see continued momentum in fares and of course.
Clubs and those at the end of the year of course, we had the pandemic from last year, which will reduce significantly our fourth quarter revenue. So.
We see a.
We're sort of a reverse pattern this year so.
With stronger revenues in the second half.
Okay, Okay fair enough and then.
The education business, the 11% growth in the quarter and then you mentioned that the digital offerings are gaining some traction how would you.
Characterize the funding environment.
As you as you move into the 2000 2021 academic year.
And then on a related note you referenced the sales the classic literacy does Oh La Unified School District.
What's been the receptivity that product and can you comment on what your backlog or pipeline looks for that.
Like for this product.
[noise] Scholastic literacy is one of a number of different solutions that we offer. It's so it's more of a core instructional program it's used in.
In school.
Certain schools districts very effectively.
But it's not it's not broad scale in its in its use most of our revenues are really coming from our normal classroom collections.
Grabbing gopac's growing digital sales classroom magazine sales.
And we see.
Quite a positive environment.
As schools.
Try to try to bridge the gap between school and home, obviously, they're turning to some of our online programs. There is also a need for engagement of kids, so getting them back into school getting the learning loss overcoming learning laws, having access to a wide number of classroom libraries.
But also programs that help teachers understand where the kids stand with their skill development such as literacy pro we're actually teach foundational literacy and phonics in grades K. too.
A core part of the curriculum, which is.
We should scholastic first so we are see Wi Fi.
Funding picture is like the rosier than many people predict because people have their budgets from last year.
And then they and there's the state governments have not yet begun to cut back on the school funding.
The way they I think they probably will absolutely covert bill from Congress coming in this in this year, but this year I don't believe there will be a material impact from school funding and Conversely, there's going to be a but demand for materials as kids try to overcome the learning laws.
From six years six months of being out of school and you attended the reading a drop that many kids are experiencing that will also help our club and fair business.
Got it Okay and then.
Then just shifting gears to the trade business can you comment on how this year's dog man sales performed relative to.
Last year's new release and.
And then.
Any way to size it could bog Oh.
How big of an opportunity is this for the trade business I mean, obviously from.
From one of the best known offers in the world, but not not really sure how to size the opportunity here.
Yes, well just starting with dog man it's.
It's doing extremely well and its outpacing the dog man from the year before it was the number one as we said in our notes here was the.
Was the number one top selling book adult or children's in the us for several weeks at the beginning of September.
In Canada, similar and this we could became the number one best selling book in Australia, but of all books.
So it's got a tremendous response and it shows that the dog men franchise is even expanding as it goes into its second and third year.
Good bug, we think will be very strong.
The new book by J.K. Rowling also aimed at the sweet spot of the.
Age group really between seven and 12.
Is going to really be.
Outstanding.
Offering in November when when it comes out.
Helping you size it.
We definitely have printing an awful lot of it go bugs or the world.
Uh huh.
We're expecting that it will do extremely well.
In this in this end of the second quarter.
Okay, and then maybe one last one from me for kind of the.
71% improvement in free cash flow use it's about an $84 million swing year on year.
Can you quantify what came from or what what cost savings contributed to that versus the collections for the hunger games book yet.
Yes.
Ladies a hunger life.
Sure.
Sure the hunger games book collections, I I won't give you in an absolute number as you as we published our financial statements, you'll see our receivables are down.
Also in terms of the costs.
I won't give you an exact number for the cost savings were but you can see we're down north of $40 million and SGN, a and thats, where the bulk of bulk of it came out of the other the other big thing moving through there is inventory purchases, which are EUR $35 million better year on year drew yes, okay. Okay. All right. Thanks, guys, you're trues up if I could just to amplify a little.
Will bid on your first question Scholastic literacy continues to sell well it's.
Its but most of the demand is in other areas of supplementary material.
We continue to be pleased with scholastic literacy, but.
It's only a part of the component of the growth that we experienced this summer.
From a education.
Okay. Appreciate it thanks guys.
Thank you.
Thanks drew.
That concludes today's question and answer session I'd like to turn the call back to Mr. Robinson for closing remarks.
Well. Thank you all for your support we had a strong first quarter from a cost point of view, we're very proud of our cost reduction program and have all the wonderful things were publishing to meet needs of schools parents children teachers as we go into the second quarter of EUR 2021 fiscal year. Thanks for your attention.
Look forward to talking to you in December.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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