Q2 2021 Scholastic Corp Earnings Call
Ladies and gentlemen, please remain on your line. The Scholastic reports Q2 fiscal year 2021 result was called will begin momentarily once again be scholastic reports Q2 fiscal year 2021 results call will begin momentarily. Please remain on your line. Thank you.
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Ladies and gentlemen, thank you for standing by welcome to the Scholastic reports Q2 fiscal year 2021 results call.
At this time, all participants are in listen only mode.
For the speaker presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone please.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
It is now my pleasure to introduce senior Vice President Treasurer head of Investor Relations Gil Dickoff.
Thank you Andrew and good afternoon, everyone welcome to scholastic sales.
Fiscal 2021 second 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 posted an investor presentation on our IR website at Investor Dot Scholastic Dot com, which we encourage you to download if you have not already done so.
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 in putting those are rising from the continuing impact of COVID-19 on the company's business operations. These forward looking statements by their nature are uncertain and actual results May day.
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 Web site, we encourage you to.
We view 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 SEC.
And now I would like to turn the call over to Dick Robinson.
Good afternoon on thank you for joining our call in the second quarter schools opened late and only one third of U.S. schools were operating within person learning as they met the continuing challenges of keeping students safe almost all schools struggle with scope schedule changes and different modes of learning this substantially affected.
At our ability to run or iconic in person book for years, and we took action to preserve profitability on liquidity, while also supporting our customers as they navigate the pandemic I'm proud of the way our company use the adapted to the continuing issues with COVID-19, we should have affected our school based businesses with resilience and urgency.
We found new ways of reaching customers in school and at home and finding new sources of revenue, while we reduce costs throughout the company to protect our operating income and cash.
First as most schools were not yet ready to commit to hold in person fears in the second quarter. We did not see fear sales increase of <unk> at the end of the quarter, our customers tell us that they are eager to host fares and they expect to do so as soon as more children attend school in person and schools operating more normally we're cautiously up.
The mystic the push to return to in person learning and 2021 full 2021 and into the future and 21 that has helped conditions improve into our society overall, we will be able to improve fears performance in the spring season, our fiscal fourth quarter.
At the same time schools and parents are relying on us for reading instructional materials as they grapple with reversing the cobot slide and our role as their trusted partner and little literacy steeping deepening.
Our trade and education businesses are thriving driven by our best selling books and reading packs workbooks on digital subscriptions. After a slow start due to delayed school openings or clubs business is on track and we're seeing momentum in our international business largely from sales gains and trade publishing in the UK, Canada and Australia.
Finally, we are reducing operating costs and streamlining or our operational structure, including significantly cutting as for you know your expenses, we're seeing ongoing improvements from EUR 100 million.
Cost 100 million dollar labor cost savings program implemented in the first quarter with benefits continuing through the second quarter in subsequent periods.
As we expected substantially reduced revenues in the second quarter. We also took additional cost saving actions in the quarter, especially in the fears business. In summary, we were able to lessen the bottom line impact to the revenue declines in fares with strong performance in our trade education and international businesses and rigorous cost.
Cost reductions as a result of these factors second quarter revenue was 406.2 million a decrease of 32% compared to last year.
We reduced EPS unit costs by 33%.
Operating income was 48.8 million compared to 105.1 million last year, we had free cash flow of 30.9 million compared to 87.7 million last year. We continue to expect improvement in the second half, especially on are important fourth quarter, but given the variables from the pending.
We are not providing financial outlook for fiscal 2021.
Turning now to our results for each segment on children's book publishing and distribution segment revenues fell 173.3 million or 42% largely due to the decline in book fairs. During the quarter. Thanks to our line up of critically claimed titles trade continued to be a standout with 21 for.
For sent revenue growth over last year trade performance was driven by titles such as day Bookies Dog man Greiman punishment. The it good luck by J.K. Rolling and old because you matter by Tammy Charles as well as are many beloved series, including the bad guys pick the pug babies.
Baby Sitters club graphic novels and of course are Harry Potter back list.
We were proud to have caisson calendars, King and the Dragon flies received for National Book Award for Young People's Literature. The most significant on or we have an exciting pipeline of titles for this holiday season and into the spring with day fuel Key's New graphic novel series Cat could come at club released on December one climbing.
On zones overall bestseller list right now.
Current Dreamworks recently announced the feature film based on Dog Man, which will further expand the already huge for bulky fan base of children ages five to 12.
As we noted in September clubs started slowly this school year due to delayed openings and significant disruption in class from practices and we're pleased that orders ramped up over the quarter driven by the strong response to our ship to home fulfillment option, we've restructured our clubs platform to uproot operate more profitably.
Got a lower revenue base and this redesign is working well.
Affairs business continues to feel the impact of the virus. Most acutely. However, we have a number of reasons to be cautiously optimistic about the spring.
More schools are committed to remain remaining safely open for in person learning, especially in elementary schools, well, new tools and programs do provide solutions for remote learning and hybrid instruction experts agree that in person learning is far better for children in grades pre K to six without in person instruction chill.
<unk> are at risk of falling behind academically, causing increased in educational in equities. Therefore at the end of the fall more schools moved in person learning and we expect that this trend will increase significantly in 2021, the coven relief build being finalized today in Congress content contained.
Federal funding for schools, which if past will bring significant additional support for schools to acquire more resources for <unk> for keeping schools opened in safe and for helping children to learn in.
In addition, our customers tell us that they are eager to hold fares and as conditions improve they will host scholastic book fairs, because there. They are an essential part of school life and rewarding for both students and schools are fares provide a sense of normalcy connection enjoy that can help with learning and prevent reading laws importantly schools also.
Steven economic incentives to host fares are fair rewards programs provide free critical resources to schools that are facing budget cuts and increased cost in our programs the low schools to acquire the books and supplies that they need now more than ever.
We've shown the ability to adjust to the new environments and schools will there for.
Flexible solutions, including in person online virtual shippable and drive through fair formats, as well as our home delivery service for online fares revenue for fair was strong for the limited number of in person fares that were held this fall and we had an encouraging response to our new 360 degree what.
Through virtual format for online fares are booked for their customers tell us that our multiple format options on our customer focus service orientation will give them the support they need to host engaging efficient and easy fares as conditions permit for spring.
While the current situation remains fluid given the increasing confidence about in person learning in schools recent positive news about vaccines, including going to teachers and promising early indicators for Q4 fair bookings, we continue to expect performance to improve in the second half for the year driven by our anticipation of bidding.
Increasing fears held in the March to May period.
In education revenue was down slightly by 3% versus last year, but operating income improved by 5.7 million over last year because of our newer digital subscription lines. The timing of revenue recognition has shifted as we recognize subscription revenue over the months or years of the billings.
Instead of upfront or digital subscription business, which includes scholastic literacy pro book Flicks first and word recorded a 30% increase in revenues on a 43% increase in digital subscription billings in the quarter revenues from workbooks in early readers increased in multiples net sales channels.
And we have a strong education segment pipeline for the second half of the fiscal year.
We are also pursuing opportunities to partner with schools to help prevent the cobot slide for example in the Ela Unified School District, where we are providing and have delivered more than 1 million books to 250000 students through a grab and go reading packs and literacy pro is helping to mitigate.
Good day effect some school closures in the district by providing over two to over 2500 E books for students to use at home in Tennessee, We launched a public private initiative to deliver 580000 books to students and teachers across the state and.
And we have a similar program in Connecticut.
We continue to expect digital engagement to drive growth in our education business over the long term as we deepen our leading position of schools trusted professional learning partner and supporting teachers and.
On the international business operating income was up despite the revenue decreases from lower book Fair sales in Canada, and the UK. We had been proved results in Australia, and New Zealand, where the impact of Cogut has decreased and trade publishing strong in all of our major international markets. In addition, we benefit benefited for wage subsidies in Canada and the UK.
In Australia.
[noise] across our entire business, we are continuing to lower costs and increase efficiency, taking major steps to reduce our operating cost right size or employee base and match or inventory purchases to consumer demand, we met or 100 million dollar cost savings target, which will continue to benefit us through this fiscal.
Period.
In identified areas for additional savings in the second half of the fiscal year, which Ken will discuss in more detail.
Cost management continues to be a major focus as we lower our cost base and improve our long term operating leverage.
We are also continuing to invest in our most promising growth areas, which are well tightly linked to our position as the for most companies in supporting reading and children's literacy we were proud to announce that Rosales Mitchell is rejoining scholastic to lead our new education solutions group, which will be comprised of scholastic education and classroom magazines.
Groups that have operated separately within our education segment.
Rose was instrumental in building, our former Edtech business, which was sold.
Several five years ago, and what she will lead our efforts to deliver a clear connected vision and support for literacy instruction on reading achievement, whether in print or digital for him in person or virtually over the coming months gross Roes will work with Greg well in Bethel Kerry.
To unify the educations solution team under a combined structure and plan, which will become effective on June for 2021.
The group will be the largest supplementary publisher, serving the education market and will expand our impact on schools throughout the United States, serving classroom teachers individual schools and school districts with differentiated marketing and sales capabilities in.
In addition, we have announced that the full carry current currently president of our classroom magazines Division will succeed Nelson Hitchcock as President International upon Nelson's retirement at the end of this year.
He will work closely with division Presidents and the UK, Australia, New Zealand and Asia as well as the export division to leverage us resources to support our opportunities internationally to expand or a significant position in the global trade publishing business and to facilitate development of new digital programs for teaching English language.
Learning a major growth area for us, particularly in Asia looking ahead, though we face continued uncertainty in the third quarter. We believe we will be able to improve our operating results in the second half for the fiscal year versus the same period last year undoubtedly the pandemic has put a spotlight on the importance of reading for learning.
Moving as well as for kids, social and emotional development educators and parents are worried about cobot slide and we expect to continue to play a key role in helping to reverse the learning loss experience for months away from the classroom, we see many many opportunities to grow our business driven by our core expertise.
Which is helping kids to learn and love to read.
And and we know that the breadth and depth of our relationships in schools and families will allow us to capitalize on the growth opportunities ahead, we expect the U.S. schools will likely stabilize in the early part of 2021, focusing on in person learning in elementary schools, which will encourage our customers to expand their connection with all of our school literacy.
Services, including that book fairs, especially in the fiscal fourth quarter with.
With that I will turn the call over to Ken.
Thank you Dick and good afternoon.
Today, I will refer to our adjusted results for the second quarter, excluding onetime items unless otherwise indicated.
Second quarter revenue was $406.2 million decrease of 32% compared to $597.2 million last year due to lower sales on our school distribution channels, particularly fares from co related disruptions as Dick indicated our trade education and international businesses, excluding fares all performed.
According to plan driven by our trade line up in our literacy solutions and education.
Operating income in the second quarter was $54.3 million versus $107 million last year.
Net income was $39.4 million compared to $72.4 million last year, and adjusted EBITDA was $77.7 million compared to $129.3 million in the second quarter last year earnings per diluted share was $1.15 compared to $2 and success.
Just last year.
Net cash provided by operating activities was $46.1 million compared to $111.9 million in the second quarter of last year free cash flow for the quarter was $30.9 million compared to $87.7 million last year for the six month period net cash provided by operating activity.
Ladies was $20.1 million compared to $14.3 million in the prior year and free cash use was $4 million this year compared to $30.8 million in the prior year, an improvement of $26.8 million, reflecting our capital preservation program during the pandemic at the end of the quarter.
Cash and cash equivalents exceeded total debt by $161.8 million compared to $135.6 million at the end of the first quarter this fiscal year and $261.7 million at the end of the second fiscal quarter a year ago.
Capital expenditures and capitalized prepublication costs in the second quarter totaled $15.2 million compared to $24.2 million last year. This limited spending was focused on our technology platforms and digital products and services as well as on relocating and consolidating some of our distribution warehouse.
Moving and back office operations, which will help to reduce fixed operational costs in the future.
Inventory purchases declined over $50 million for the fixed them on period compared to last year as we continue to leverage newer processes and tools to manage inventory levels as demand changes.
Our balance sheet remains solid and our working capital management and access to liquidity remains strong at quarter end, we had $356.6 million in cash on our balance sheet.
We also entered into an amendment to our committed credit facility, including adjustments to and suspension of certain covenant threshold for the revised terms, which were covered in our press release include Covenant relief made available by our lenders, which we believe provides us with both financial assurance and the necessary liquidity and flexibility.
To enable us to manage the business through the pandemic, we will continue to assess funding needs in the context of evolving information on in school instruction patterns and of course banking market conditions.
Turning now to our segment results in children's book publishing and distribution.
Second quarter revenue decreased to $240.3 million down $173.3 million compared to the year ago quarter, primarily from the decline in ferrous as Dick noted trade revenues increased by 21% year over year, driven by demand for our front list and backlist titles segment operating income.
<unk> was $37.7 million, 66% below last year as a result for the book Fair revenue decline our cost savings on restructuring activities are focused on mitigating the impact of covert disruptions to our book fairs business.
In education segment revenue was $67.5 million down by just 3% as previously announced we are winding down our custom publishing business and the year over year decline is due to lower sales in this area.
Our grab and go summer reading packs workbooks in early readers continue to be in high demand in the quarter.
As for our community based services and resources designed to support students and families who are learning at home digital revenues increased by 30% bookings were up by 43% segment operating income was $11.9 million up by 92% due to improved product mix and operating cost reductions.
In our international segment second quarter revenues were $98.4 million down 13% from last year due to cold weather related disruptions to the fares business in Canada, and UK and lower direct sales in Asia our sales.
Sales in Australia, New Zealand have rebounded and trade publishing sales were up over last year and all of our major international markets.
Foreign exchange benefit reported revenues by $2.5 million due to the weakening US dollar operating income was $20.8 million, which was a $9.1 million improvement as a result of our cost mitigation efforts.
We have overachieved, our expected full year cost savings target of $100 million this year.
Additionally, we have identified areas, where we can achieve additional savings in the second half for the year, including optimizing our distribution network and reducing our footprint for warehouse on office space, We continue to limit discretionary spending and to calibrate inventory purchases to match expected sales volumes.
In the second quarter, our cost reductions drove for more than $70 million reduction in SGN, a expense year over year, a decline of 35% compared to last year.
While these savings include certain variable costs much of these cost savings are sustainable beyond fiscal 2021 on.
Our actions will improve efficiencies increase operational leverage and reduce our cost base after the pandemic.
While we're not providing outlook for the fiscal year, we will provide additional color on the factors impacting our business.
As Dick said, we know that our customers are eager to hold fares for many are not able to do so as a result, the covered where that is because the continued full or partial school closures limited resources or capacity restraints.
We believe that returning to him person instruction will be a priority for school districts across the country and 2021, and we will have a positive impact on our fares business as more schools will be in a position to hold in person book fairs.
A return to in person instruction will also benefit our education business as schools will need to replenish their classroom book collections and when the other instructional resources.
We are remaining in close touch with our book fairs host customers focused on booking fares for the March to May period. When we believe conditions will be more conducive sporting in person fares, we've added incremental resources to our sales and outreach functions and our distribution operations are prevented prepared to provide fares as the demand return.
Turns occur.
Accordingly, we are cautiously optimistic that we will see improved results in the fourth quarter, particularly on book fairs based on schools returns in classroom instruction in the meantime.
We're continuing to support schools with virtual fares digital engagement tools flexible distribution methods, such as our popular ship to home option our.
Our digital subscription program should continue to see higher sales on.
Long districts that continue remote or hybrid learning models.
Our outlook for trade remains positive and we expect continued momentum we have an incredibly strong new release pipeline for the second half, including the launch of day Pelkey Cascade comic clubs series and new releases in the Baby Sitters Club graphic novel Dog Man and wings of fire series.
We're also looking for to new titles like ground zero by Alan Graf we've.
We believe that production partnerships and licensing deals and our growing media and entertainment business will continue to bolster book sales in.
In summary, we remain intently focused on reducing our cost base preserving profitability on maintaining liquidity liquidity as we adjusted our operations to navigate through the pandemic.
With that I will hand, the call back to Gil for the culinary session.
Thanks, very much Ken and you we're now ready to open the lines for questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
Please stand by while we compile the Q on a roster.
No show, we have a question from the line of drew Crum with Stifel.
Low at least your line is now open.
Thanks, Hey, guys good afternoon happy holidays.
Maybe starting with fair can you talk about how.
Difficult to Q paragraph on.
And then your expectation for free you relative to fiscal Twoq here should it.
Less bad than what you experienced weaker difficult Q.
And then just the last part of this question your optimism for fiscal Fourq. You can you talk about the fair bookings and how that compares to where you were.
Going on into the fiscal second quarter.
Three questions Yeah, let me take a couple of them on the Alaskan too.
With me on this.
In respect to the progress of the of the fares of particularly the in person Theres during the second quarter drew.
So what happened was we have they started off very slowly.
The bookings.
Increased as people got back into schools, and we're able to reach some other customers.
Wow.
In late October early November.
The big shows.
Signs of life, although at a much reduced basis compared to normal of course.
But then the increasing kogas.
Towards the end of the month.
Cause cancellations because people were very concerned about covert spread at that time. So they they cancel some of these in person fare so that the trajectory that we anticipated didn't quite happen exactly as we thought.
In respect to the relationship between.
The fourth quarter.
Or the book the bookings for the spring now compared to the bookings for the year ago.
There really isn't valid comparison there because.
People are still.
Thinking about the.
They're they're they're just considering how they're going to operate book fairs in January and February we expect them to go back to normal in school and that the biggest increase in bookings is going to take place in that period for the fourth quarter.
We are getting bookings now for the for the fourth quarter.
On the obviously.
Obviously for in person fares as low as for our virtual fares, but the trajectory is going to be quite different.
This year from the way it was last year when the fares were.
Booming in this in the second quarter.
And and nobody was anticipating any fears would need to be canceled in the fourth quarter that at that point.
Ken.
Yes, Hi, Joe This is Ken.
So so yeah as as Dick as Dick pointed out.
The the booking for for Q2, we need to really book Q2.
During this year and we didn't we didn't get a lot booked and we didn't get on a lot affairs by the end of Q2 Q3 is typically a quiet period for us anyway. So as this pandemic goes on Q3 as it is generally quiet, but we are booking into the March to May period, now and we put a lot of resources.
Around outreach around understanding what our customers are doing and we continued to to pursue those those opportunities there our customers want to have ferrous sales.
Dick and I sat through a.
A meeting with our marketing team yesterday, where where clearly as we as we talked for our customers, they're very interested in having fares, it's a matter of being able to get back to them and so we're we're increasing our outreach.
Where our car calls of our volume I won't give you the call volume by extremely substantial.
In terms of our customer base and another thing that we're looking at is the back half we have a lot of schools that would ordinarily host a fair in the fall and possibly not in the springtime. So we were looking at the back half for this year Q for this year as actually having a larger customer base to approach grant.
On the yields are going to be a low but different on that but we do have a larger customer base to approach because we have a lot of schools that didnt host fares in the fall. So we're we're busy drew well that's what we're doing here, Okay got it fair enough.
Just shifting gears to the clubs business. It sounds like September was difficult, but then performance improved.
Where.
October and November were better what were they up year on year and then based on what you saw in the latter part of the quarter. What do you think that portend to for.
The second half.
Well drew to start with we reduced to EUR or.
For the full we reduce the revenue expectations on clubs in order to rightsize the business for price point of view, so we reduced some costs and mailing out kits and having multiple offers and so we have changed or for bill.
On this dynamics for the clubs.
And focusing on profitability somewhat lower revenue base.
But it.
September.
Schools were like Mad House in September teachers, who they were teaching the kids weren't there one day and on the back the next day other on the virtual.
One day so for it. So so nothing was going easily for schools in September and book clubs or other orders were up to their normal September orders in October November.
Came in line with the prior year.
So that was really encouraging, particularly because weve reduced our revenue expectations.
Decembers, a little slow because of.
The we in order to get your books shipped by holidays, and you know U.S.U.P., EPS, which which we work with very very closely use those struggling with all the packages. It's a tear delivering so they have put in.
More time for the books to arrive and particularly at homes, where were seeing more revenue but.
So as of December has been a little soft, but we do think that of John you know the rest of the year is going to come in line.
With.
October and November on that we're going to experience.
Pretty solid.
Performance in the second half.
Okay helpful on.
On trade it just a point of clarification you mentioned the pipeline you have in front of me for the second half.
Oh are you suggesting for.
We need to grow in the second half for fiscal 21 or is the common.
Specific to the entire fiscal year, because as I look at the second half you are lapping a about a 30% comp.
Yes, well.
On the Cat Kid has started off very strong.
We have a number of.
Good releases run a role in the business, we're taking on more market share.
And though we for.
So we believe we can maintain the place for the pace that we have.
Done in the first but you're right that we have a I think it was a tough comp there I think there was and then other killackey book that was in there last year.
So.
We are going against a strong quarter or store on half yes. Okay. Okay. Just one last question for me then on the cost side, you mentioned in achieving the $100 million in savings how much.
How much of that is sustainable going forward and you alluded to some additional opportunities any way to quantify.
What the savings the accompanying savings are from on those additional opportunities but.
What weve really alternatives to Ken, but I just want to make one comment for US grew I mean, we really did this I know people talk about their cost saving programs and certain amount of skepticism attached to them, but in the first quarter, we reduced our costs and labor inside.
Employee labor and non employee labor outside labor by $100 million.
And we're seeing the benefit of that come through in the second quarter and will Ratably for should go through the year. So that that's a real saving that were holding on to what Ken runs and cost save cost those saving a process, which where he's looking at these things every every day to make sure we're maintaining those costs.
So I'll ask him to answer the rest of this call through but this is something that we've done and we take great pride and we needed to do.
With our revenues declining you needed to match or our cost base to our revenue.
Ken.
Yes, so true yeah, we who as Dick pointed out we're we're on pace to actually exceed the 100 million for the for the year and we will do that.
How much is sustainable on the long term is a great question and.
Without getting into too many details.
It could be it could be about half of it so plus or minus half of it. So I think that's it's around the rigor, though that we've taken on this so as Dick mentioned that.
We're looking at this every day and we we've put controls in place to to make sure that we keep the the costs out of every every corner of the of the business right now so.
It's it's a new rigor that we have in the company and where we are monitoring this constantly.
In terms of the back half we're looking at some things that are they are clearly sustainable so were looking at.
On optimizing our distribution network and we've done a lot of analytics around our logistics support that that's going to help us do that so.
We're looking at reducing our footprint I mean, I think everyone in the world now understands what they need in terms of office space and it's not as much. So we're going to be looking into that as well.
But really a lot of network optimization, a lot of warehousing and distribution costs and office spaces is probably our our near term opportunity.
Okay and maintaining the other billion that we already took out on the labor side, we will do that that will continue.
So that's that's a lower permanent lower cost base for the company.
Okay. Okay, guys I appreciate it thanks for holiday.
Thank you so much true thanks to.
Thank you.
Now I will turn the call back over to Chairman, President and CEO Dick Robinson for any closing remarks.
Well. Thank you all for your support we are proud of the way we adapted to.
Changed circumstances.
And found new ways of selling and face the cost reduction program that we know we knew we had to get done that's continuing in the second quarter will continue through the balance of the year, we are cautiously optimistic on the.
Return of a book fairs in the fourth quarter.
And we thank you for your continued support.
And confidence and scholastic and we will continue to.
Help parents and teachers with the very difficult issues of overcoming learning laws, which is becoming a deep rooted problem in the company in the country and we need to ensure that 12 kids can read on grade level and we continue to work on that thank you for your support.
We will talk to you again in March.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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