Q3 2021 Scholastic Corp Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome to Scholastic third quarter fiscal year 'twenty 'twenty, One financial results conference call. At this time all participant lines are in a listen only mode. Please be advised that today's conference is being recorded if you look for.
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I would now like to hand, the accomplished though would you Gil default senior Vice President and Treasurer. Please go ahead. Thank.
Thank you so much John and good afternoon, everyone and welcome to Scholastics fiscal 2021 third quarter earnings call. Joining me today on the call, particularly Robinson, our chairman President and Chief Executive Officer, and Ken Cleary, The company's Chief Financial Officer.
And have posted an investor presentation on our IR website at Investor Scholastic Dot Com, which we encourage you to download if you have not already done so.
I'd like to point out that certain statements made today will be forward looking such forward looking statements are subject to various risks and uncertainties, including those arising 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.
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In addition, we will be discussing some non-GAAP financial measures as defined and regulation G and the reconciliations of those measures to the most directly comparable GAAP measures can be found and 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 SEC.
If you'd like to ask a question.
Send it to our IR E mail and Investor underscore relations at Scholastic Dot Com and we will respond within two business days and.
And now I'd like to turn the call over to Dick Robinson.
Good afternoon, and thank you for joining our third quarter call. We started 2021, reflecting on our roots with a segment on the CBS Sunday morning focused on how for generations. We are inspired and supported readers through our classroom magazines and trade titles clubs and fairs instructional resources for <unk>.
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Throughout our 100 year history Scholastic has always been there to support educators and students. So as we do today a full years since the pandemic shutdown began and schools closed throughout the United States and the globe. We are proud of our reputation and our ability to explain and contemporary issues and a balanced way to bring stories.
Diversity, and social justice to children and to help teachers and students learn through our magazines and books and digital materials, not only the skills of reading and learning social emotional impact of great stories, and the ability to understand through information and the non fiction, how the world works and.
How we operate our Democratic system. All of this is part of scholastic submission and daily work.
Turning to our recently completed third quarter, despite the $96 million or 26% decline and revenue mainly in book fairs, we were able to improve operating loss year over year because of the significant cost reductions we've made throughout the business for the nine months year to date revenue.
Climbed by 304 million to approximately 900 million this year compared to our pre COVID-19 results last year, but our operating income only decreased by $9 7 million. Excluding one time items, our actions to change our operating model and reduce our cost base have largely offset the bottom line.
Impact of the pandemic related disruptions and should provide operating leverage going forward as we rebuild our revenues, which was and in progress goal.
As we begin the fourth quarter, most schools across the United States are returning and classroom instruction and the climate for book fairs, and is improving book fears have always been a key part of school leaders calendars, and we are continuing to tailor their formats to enable safe and flexible experiences whilst.
Schools are still unsettled and back to school patterns vary throughout the U S. Their husband and uptick in Q4, a fair bookings helped by our intensified marketing programs. While the number of book fairs, We will conduct and fiscal 2021 will be significantly lower than our historic norms. We are seeing a marked improvement.
Our in person and fear accounts for the fourth quarter from the low levels of the previous fourth four quarters, giving us reason to be optimistic for book for your business in fiscal 'twenty two.
And clubs, we have sharply improved the bottom line as we reengineer the business to drive profitability and reduced revenues, we've improved distribution efficiency reduce marketing spend and increased revenue per item sold.
Our pivot to at home delivery led to higher revenue per transaction from parents, helping profitability.
Warehouse teams function well throughout the year, despite difficult supply chain issues and change processes within our distribution center to reflect safety measures for the staff. These plan changes and the club business led to substantial improvements and operating income.
Meanwhile, our trade education and international businesses continued strong and both revenues and profitability for the quarter and the nine months year to date and trade. We were showing continued strength and our ability to publish highly sought after titles both in the U S and internationally as a result from fiscal 2018.
For our current quarter trade revenues have grown by approximately 50% domestically and 30% internationally, our expertise and creating a strong diverse lineup of titles that parents want to buy and kids want to read continues with a recent best sellers such as the new wings of fire novel and Cat could comment club.
And from day pill key.
In fact, <unk> weekly recently noted with this headline unstoppable, our unstoppable performance and children's fiction with our titles, taking a 44% of the 2020 Best Solar chart and publishers weekly up from 28, 8% last year no small feat.
We're also building the audience for iconic characters and series, two and increasing pipeline of streaming TV and feature film development and have seen a wonderful response to recent properties is just one example, stillwater or Apple TV and animated program based on some shorts by John Dray move.
Has been launched and 107 countries and as John was just nominated for an and the award. We also had our second ratings hit on the Hallmark channel with a movie playing Cupid based on the book by Jim and minor halls and our.
International segment, we've had significant growth and profits throughout the year. Thanks in part to our successful revenue increases and trade similar to the U S. Fair accounts in Canada, and the UK declined, but we implemented cost reductions and set the stage for a resumption of affairs growth next year.
Australia, where there was a lesser impact on schools from pandemic fears have continued to be strong and.
Asia, we are investing and new English language learning.
Products for schools and homes and continue to expand our franchise schools and direct sales to parents.
Your Internet marketers in China. We're also working with a local partner to develop digital content designed for English education, and teaching solutions and Korea, while our improved profitability and our international business was also helped by government subsidies for labor and the U K, Canada, and Australia, we will match.
And your costs down.
Subsidies drop off.
Responding to increased opportunities for our education business, we were forming a new education solutions group that combines our classroom books and curriculum division with the classroom magazines digital subscriptions and teaching resource group beginning June 1st our new fiscal year Rose <unk> Mitchell returned to the company this year.
And to lead this group, bringing her deep understanding of the education market and proven skills and digital product development, our new structure, which brings the editorial strength of our classroom magazine group together with our digital product team and recent search based and instructional solutions, all supported by marketing and field selling teams will put.
And in an excellent position to capture growth opportunities focused on literacy improvement.
The company believes that can benefit by expanding our resources and education to meet the unprecedented amount of federal stimulus funds dedicated to supporting K 12 education over the next two to three years. This federal investment of $180 billion, which was three times the normal investment and.
And one year of federal money going to schools will be a game changer for education educators and districts providing.
And the desperate for.
<unk> resources to invest and the teaching and learning solutions that they desperately need to prevent a prolonged learning equity and development crisis for our young generation and brought on by the challenges of the pandemic the.
For child care tax credit investments and family Health and support for K 12 schools should all work together to improve the lives of children supported by schools and education is.
And those districts reopen schools now in early 2021, they are focused on flexibility connectivity and increased use of technology building on lessons learned during the pandemic. Many districts are also discussing home learning as an ongoing initiative and our increasing outreach to build family engage.
And especially for young learners. These are areas of scholastic strength and.
And we're putting our resources behind these areas that address both the urgent and longer term needs of educators you can see this through our new learning resources, such as pre K on my way a curriculum program for early childhood, which is launching this spring for purchase in Q1 for fiscal year, 2022, and beyond and a.
And some are reading offerings. Some reading has always been and important business to scholastic, particularly in our education group and we have a history of supporting some are learning success with book packs and critical and programs critical programs like Lyft camp.
The ideal partner and this crucial moment because of our deep knowledge of how to engage kids and reading and accelerate their learning while our free and some are reading program continues to serve as an entry point for many this year, we are creating new offers which build on what we know works well clubs and fairs will also be more active and.
Our summer efforts and and this all hands on deck moment.
For our nation's students to gain a reading skills during the summer.
With a reduced cost base for $100 million cost savings program targeted investments focused on our expanding growth opportunities and new federal funding provided much needed resources for our customers. We believe we are in an excellent position to further solidify our market leadership and literacy and learning.
Our major opportunities and priorities over the next year is light and the following areas first rebuilding our fair revenue second expanding the reach of our intellectual property through our trade and international book publishing businesses and developing more streaming TV and feature film properties.
And third increasing investment in and expanding the reach of our education content, especially digital for.
<unk>, enabling more parents to acquire children's books directly via home shipment.
Fifth growing our international English language learning business in Asia.
And then supporting these six continuing to make it easier for our customers to acquire product and information through our digital platforms and <unk> finally to continuing to simplify our internal processes, while lowering costs with these key priorities and we expect to increase revenue and profitability and the next year's based.
And our ability to learn the lessons from the pandemic.
And excuse me one second and then continued to adapt to the rapidly rapidly changing world of technology and access to information as well as improved methods of distribution.
As we realize how much we've done to change our business and this pandemic year. It is clear that the scholastic employees did an extraordinary job of adapting our services to maintain and expand the substantial value we bring to our customers together, we completely re imagine the way that we get books and the hands of kids.
It is a significant achievement given the drastically change conditions and on the fly adjustments that were necessary during the heart of the pandemic when many supply chains and delivery processes were severely disrupted.
We've repurposed our assets improve capacity and delivered product and school and at home and both more efficient and customized ways and our progress should continue to provide leverage as we ramp up next year.
Many employees work remotely from home for the full year, others came to work and our warehouses adjusting to new ways of working brought on by the pandemic as well as making new delivery methods work and enabling the growth of ship to home or providing for the sale and packaging and the individualized book backs sent directly to the homes.
And some children our success this year stems from our employees the ability to serve the customer and new and innovative ways. We thank them sincerely and deeply for defining the strengths of scholastic and providing reading and learning to young people. We continue to be cautiously optimistic about the fourth quarter and we are confident that our SKU.
And based distribution channels, we will have a strong longer term recovery remain full and we remain focused on capturing the significant opportunities ahead, while building momentum and the areas that succeeded during the pandemic.
Rebuilding also in the areas that were most deeply affected and gaining leverage from our cost reduction programs and are challenging 100th year scholastic. Once again proved its ability to move decisively and new ways to make reading and learning available to children and parents teachers and schools.
Whatever whatever the circumstances required thus continuing to define scholastic support for schools and families and helping children learn and grow.
With that I will pass the call to Ken Cleary.
Thank you Dick and good afternoon, everyone today, I will refer to our adjusted results for the third quarter, excluding onetime items unless otherwise indicated.
Third quarter revenue was $277 $5 million year over year decrease of 26% compared to last year due largely to lower sales and book fairs as Dick mentioned.
Operating loss was $11 9 million compared to a loss of $16 $8 million last year net loss was $4 8 million compared to a loss of $11 $9 million last year. Adjusted EBITDA was $14 2 million compared to $5 $6 million last year and loss per diluted share was <unk> 14 compared to 30.
For last year.
Though we had lower revenues our actions to reduce costs and scale our operations, resulting in improved bottom line results and effectively safeguard our cash position.
We also benefited from certain COVID-19 related wage and rent subsidies, mostly and our international business. This was slightly offset by increased postage and shipping charges for this holiday season through the parcel carriers limited customer capacity and increased pricing and surcharges.
Over the course of the quarter, we continued to optimize our distribution network and reduce our warehouse and office footprint.
And the U S. We exited satellite office space, and New York City, and commenced and network optimization plan and our book for its distribution network, resulting in the permanent closure of 12 distribution branches, while retaining our capacity to reach our customers due to our improved logistics capabilities and delivery methods and our U K operations, we sold and now redone.
Distribution facility.
We continue to pay our operating expenses limit discretionary spending and better align our inventory purchases to match expected sales volumes, leading to the achievement of our $100 million cost savings target.
Approximately half of these savings will be permanent and will result in improved profitability as we rebuild our revenue base beyond the current fiscal year.
Many of these cost savings were enabled by the technology and related process changes that we have been implementing over the past five years.
Our balance sheet remains solid supported by our cost management and working capital controls net cash from operating activities. This quarter was $16 4 million compared to $29 $7 million last year. Despite the decline in revenue of nine point of $95 8 million free cash flow for the quarter was $5 5 million.
Compare compared to $4 $9 million last year.
Year to date net cash from operating activities was $36 5 million compared to $44 million last year and free cash flow was $1 $5 million this year compared to a use of $25 $9 million last year as our capital spending continues to decline from the high investment levels and previous years.
At the end of the quarter cash and cash equivalents exceeded total debt by $162 $5 million.
Compared to $247 $7 million last year, and $161 8 million last quarter. These figures are the direct result of our stringent initiatives to preserve our cash position and the expected decline and capital investments.
Turning now to our segment results and children's book publishing and distribution revenue decreased by $78 9 million to $141 $3 million.
Largely due to a lower number of in school fares and the quarter and clubs revenue will also decrease as part of our strategic shift to reduce costs and improve profitability and the clubs business, we have reduced costs by leveraging digital technology to reach our customers and focusing our offer plans based upon customer buying patterns.
Additionally, we quickly pivoted and offered our parent customers the option to receive shipments directly at home and well received service during the pandemic, which also helped drive an increase and parents order size.
The school channel declines were partially offset by continued trade performance revenue was driven by a strong frontlist titles, such as Cascade Common club by day Pelkey, The Baby Sitters club graphic novel number nine and Harry Potter and the Sorcerer Stone <unk> edition.
Our cost savings actions have continued to mitigate the impact of Covid disruptions on our <unk> business and a more streamlined structure will provide improved profitability moving forward.
Our book Fairs distribution network optimization activities resulted in onetime lease asset impairment and branch consolidation costs of $2 $9 million.
Excluding these onetime items segment operating loss was $3 7 million and the current quarter down $5 9 million versus last year.
And education revenue decreased by $8 million to $66 $3 million down, 11% and a quarter, where we had a tough comparison to last year pre pandemic. When we delivered a large sales to the Houston Independent School District.
In the quarter, we increased sales of take home book packs and teaching resources early readers and workbooks, demonstrating our ability to meet changing customer needs during the pandemic Dick.
Digital subscription programs also remain in high demand with digital bookings, increasing by 41% and the quarter segment operating income was $10 $1 million up by 3% due to operating cost reductions.
And our international segment revenues were $69 9 million down $8 $9 million from last year due to continued cover and related disruptions for fares and carrier and the U K and.
And lower direct sales to Asia.
It was a $3 $5 million favorable impact from foreign exchange as the dollar weakened.
Operating loss improved to $900000 or $2 $8 million improvement versus last year due to cost reductions and certain COVID-19 related government wage and rent subsidies and Australia, Canada and UK.
While we are not providing outlook for the fiscal year, we will provide additional color on the factors impacting our business.
As more schools resume in person instruction and as we continue our intensified marketing efforts there has been uptick and spring fair bookings and we're focused on the customers who are most likely to wholesales. This spring based on their learning mode, and we will continue our intensified marketing outreach for the fall season and.
As Dick mentioned were also amplifying our summer reading campaigns to meet the need for resources supporting students continue learning leveraging our connection to educators parents and students as they solidify summer learning plans right now.
These programs and offers have started rolling out for all of our channels and sales will carryover into June.
We expect another strong spring Frontlist for our trade division with new titles for many of our top selling properties and authors.
In summary, the actions we took over the last year were necessary given the disruptions that we faced along with our customers and partners all around the world.
The upside is that we now have a lower cost and more flexible infrastructure that will provide operating leverage as we grow our revenues next fiscal year and further into the future.
With that I'll hand, the call back to Gil.
Thank you Ken.
As a reminder, we invite questions to be directed fine.
Net E mail to Investor underscore relations at Scholastic Dot Com, we will respond to your queries within two business days.
And now I'd like to turn the call back over to Dick Robinson for closing comments.
Thank you all for joining the call today, we're looking forward to this quarter, our final quarter of the year and to the fiscal year, 'twenty, one and and.
And now ahead to FY 'twenty, two as we see a strengthening market and improving operations for the company. Thank you. So much for listening today, we'll look forward to talking to you in July.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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