Q4 2021 Scholastic Corp Earnings Call

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Good day and thank you for standing by welcome to Scholastic reports Q1 fiscal year 'twenty 'twenty..1 results conference call for this time all participants are in a listen only mode. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today, Gil takeoff Senior Vice President Treasurer, and head of Investor Relations. Please go ahead.

Thank you and good afternoon, welcome to scholastic <unk> fourth quarter and fiscal year 2021 earnings call. Joining me on today's call are James barge the board's lead independent director.

Youll lay lucchese the newly appointed chair of the Board and also the Companys Chief strategy Officer, and President of Scholastic Entertainment and of course, Ken Cleary, Our Chief Financial Officer.

I'd also like to introduce Peter Warwick on today's call Peter will officially become Scholastics, President and Chief Executive Officer on August 1st we 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 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 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 may differ materially.

<unk> 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 Companys earnings release filed this afternoon on a form 8-K, which has also been posted to our Investor Relations website.

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 have any questions. After todays call. Please send them directly to our IR E Mail address investor underscore relations at scholastic Dot Com and.

And now I would like to turn the call over to Jimmy barge to begin this afternoon's presentation.

Thanks, everyone for joining our call this afternoon.

Had the privilege of serving on Scholastics Board since 2013, and as the lead independent director since 2015, and I've been constantly inspired by the mission of the company the loyalty of both our employees and customers and of course, the vision of <expletive> Robinson, who lead the company until his passing laugh.

Fine.

From across the Globe are publishing colleague educational leaders authors teachers principals readers and the many others, who had the opportunity to work with <expletive> over the years chaired an outpouring of attributes in his memory.

We thank all of you.

Yeah, Ole Ken and I together with Andy Haden, our EVP and general counsel have been hard at work ensuring that day to day operations move forward uninterrupted with an underlying core of stability in our eye on the future business priorities and opportunities that have been identified during this past fiscal year.

Well I've been very close to the business for quite a while.

Last several weeks have made 3 things very clear to me first the profound impact of Dick's legacy on successive generations.

Secondly, the scholastic and S employs remain resilient and continue uninterrupted to demonstrate an amazing ability to deliver through adversity.

And most importantly, their families educators and kids will always have a partner in scholastic.

On behalf of the board I'd like to recap steps taken and announced earlier this week to further solidify the future of scholastic.

Youll, a lucchese was elected a board member and appointed as chair of the board.

Robert demand was elected to the board as the designee of the Robinson family and.

And effective August 1st Peter Warwick was appointed the Chief Executive Officer, and President of Scholastic.

Peter has held impressive leadership roles throughout his career at Thomson Reuters had a multiple and significant business unit within the global company as well as having held executive roles at Pearson.

His wealth of experience and non passion for the scholastic mission as seen in his role as an independent director on the Scholastic Board of directors since 2014 will promise, both continuity and advancement for scholastic.

The board feels Peter is exceptionally qualified to lead scholastic as the company continues to grow our education solutions business expand the reach of our digital offerings strengthened partnerships and focus on creating value for all stakeholders.

It is with great confidence that we all welcome Peter.

And with that I'll now turn the call over to you all day.

Thank you Tony.

And with a special amount of time for crucial from for the members that are on board for all their support and contributions during this time.

It would be difficult to overemphasize the impact that <expletive> is lifetime publishing children's agitation and ultimately the children scholastic reaches as long as the families and educators, who support them for nearly 50 years take lead scholastic businesses operations and strategy with a focus on both on machines and growth now it's time for us to continue to move forward.

For it on barrels index legacy Scholastic has been built on a foundation of our employees working together with the collective drive focused on our customers supporting the government's letter C and helping to provide every child, but the opportunity to thrive.

I wanted to thank each of them for embodying the scholastic mention this past year puts your heartbreak that has kept scholastic moving forward and the reason for our strong results. This past quarter. We navigated this past fiscal year with focus on disciplined execution successfully we will continue to support children in ways that no other company can.

As we have during this unprecedented pandemic on time of change.

Scholastic dramatically improved results year over year across all business segments in the fourth quarter not unexpected as a comparable time 1 year ago was in the height of the pandemic shutdowns and uncertainty and the last we're seeing strong underlying trends. In addition to closing a strong Q4, we were profitable ex 1 time items for the full year.

And we are well poised for fiscal year 2022.

And our specific businesses bookstores contingents are tailored for experiencing the need to sclerosis reopened in the spring and intensified marketing through positive results.

While we hope for even stronger opportunities to host a premium in person fairs in the fourth quarter. The increased appetite from schools to include first on your calendar planning keeps us cautiously optimistic for the fall season.

This summer we are focused on our operational readiness as bookings increase ensuring we have the right offerings marketing and strategies to meet schools, where they are this fall and beyond.

<unk> had a very positive quarter on a reflection of more teachers resuming in classroom activities to re engage and excite students around learnings for Bucks.

With increased teachers' sponsorship and streamline marketing and processes revenues improved in comparison to the previous year's quarter by $17.9 million.

Trade continues to hit the right Mark with every OS script Dog Man and Kat kit comment credit from both Turkey, and the graphics Babysitters club all continue to prove the influence of graphic novels to bring children to reading and new picture books, such as wishes and allowance words solidify the power beautiful diverse published.

Audiences are eagerly awaiting the next cat kit common club graphics forthcoming number 10, and the baby Sitters club.

For the brightest night on was the higher and of course, J K Rowling New children's novel, the Christmas pegged coming in October.

We utilize virtual events in powerful ways. This summer we are launching family book fast to bring authors and books directly to families in a new way.

We also continue to invest in our strategic growth plan to leverage our IP across platforms Scholastic Entertainment now has numerous projects in development and is gaining recognition in the industry for excellence Stillwater on Apple TV plus based on the picture books by John J Moose, just recently won a Peabody Award.

On an earned a daytime Emmy award for <unk>.

Gary strikes and important tone for today's parents, bringing 9 for months to their children. During this constant state of change in September we look forward to unleashing Clifford the big Red dog on theaters and introducing him to new audiences and this larger than life format and story.

Just as our trade divisions across the world have keen insight into what kids want to read our education Division has the pulse on what teachers need in their classrooms to best support their students. The success of the fourth quarter and the full fiscal year is because of the close partnerships. We've made over the years with state districts school and classroom leaders.

Those relationships and the insights they provide guide us to customize on products quickly to match the ever changing landscape of education, particularly early in the pandemic as well as to be forward thinking driving our strategic and upfront investments in areas of growth such as early education with pre K on my way social emotional low.

On each of our Yale child steady signing partnership and not all of this with the backdrop of unprecedented federal funding, we are leaning into this climate and evolving with it.

Evidence of how well our efforts in education and support our customers and our business is in the results of the 9% full year growth in revenues for.

Fourth quarter showed higher sales in comparison to the previous year in most channels led by the district level need and innovation around summerlin and classroom refreshes as children return to school.

And still keeping the needs for that home learning net teaching resources is up by $10 million year over year and digital bookings are also up led by products such as scholastic first.

Our International Division continues to benefit from our global strength in trade publishing 2 highly anticipated book globally in the coming fiscal year on front of Australian based here in <unk>, the bad guys series.

Similar to the U S International clubs and fairs are beginning to recover and cost reductions support forward growth in the coming year.

Asia remains a growth opportunity as we continually expand our reach through franchise growth and direct sales to parents.

Looking ahead in fiscal year 2022, we're feeling positive about back to school season, and beyond particularly as we rebuild our Fas business. There is positive momentum around fall bookings with the understanding that the climate remains somewhat uncertain of becoming clearer.

In the fourth quarter success in clubs keeps us optimistic for our distribution channel that March trade will continue its stellar track record of publishing books that resonate with kids and become part of the contemporary culture and an increasingly broad way as our content continues to be adapted for streaming TV and film.

Education will benefit from its streamline approach to serving customers as a combined group and we are well poised to help them navigate a new normal on new streams of funding.

International will continue to have a diverse approach tailored to its markets covering trade publishing education content, including English language learning tools and our global distribution channels.

Finally, welcome Peter he has been a crucial for us on our board. These past 7 years and I'm confident that working with you will help us take advantage of our many opportunities for progress and growth.

With that I'd like to turn the call over to Ken Cleary.

Thank you Ali and good afternoon today, I will referred to our adjusted results for the fourth quarter and full year, excluding 1 time items unless otherwise indicated.

Please refer to our press release tables, and SEC filings for complete discussion of onetime severance closure and settlement costs.

Impressive nature of the pandemic created challenges for all of scholastic businesses. The actions taken by the company during the past year and a half while drastic where necessary we focused our efforts in 2 distinct areas first and foremost we pivoted our resources to meet our customers' changing needs as a result of the pandemic when T.

And students could not receive book clubs orders in the classroom, we offered ship to home options.

When schools could not run on our value in person book fairs, we offered virtual fairs, when parents needed easy to deploy learning at home, we provided teacher resources and digital content.

When school districts identified the greater need for independent reading during the pandemic, we offered individual book packs that could be distributed to students from the school district.

From our classroom magazines couldnt be delivered to students and schools, we offer digital only magazines. These solutions demonstrate the company's ability to pivot to our customers' needs, but Moreover, these newly developed distribution methods demonstrates that demand for the company's content remains strong regardless of how it is distributed all told these new distribution.

Methods supported over $140 million of our revenues in fiscal 2021 second we're able to address thickly reduce costs in the face of a severe downturn on revenues as a result for the pandemic.

Early in the pandemic, we initiated a project to reduce costs by $100 million.

Target, we exceeded we continued our furlough program through the first quarter, we consolidated functionality and combined resources across the company streamlining many processes.

We leveraged lower cost options to execute various functions throughout the company, we eliminated substantial discretionary spending during the pandemic. We permanently closed 13 distribution facilities and consolidated our New York City office footprint into a single facility and we temporarily closed other distribution facilities, we've focused our.

And capital projects on those projects deemed essential and we better matched inventory purchases to expected demand. The results of these efforts were significant exclusive of onetime severance facility closure and other costs, our SG&A decreased over $170 million compared to the prior year, our capex decreased 2.

<unk> hundred $47.2 million for the year compared to $62.7 million in fiscal 2020.

Our net cash position of $176.3 million was relatively flat compared to the prior year end balance of $175.3 million and our free cash flow has defined was $20.5 million compared to a free cash use of $89.1 million last year. Many of these costs will return to the company.

As our revenues increase post pandemic, but approximately $50 million of these cost savings will be permanent in nature. When our revenues returned to historical levels for arm for better margins in the future for the opportunity to dedicate resources where needed while the above pandemic related actions were necessary given the conditions more important to the.

Company before during and after the pandemic is the value we provide to our customers through our brand our content creation as evidenced by our strong trade results in FY 2021, and our distribution capabilities. Our revenues in the important fourth quarter grew to $401.4 million or 41% versus the <unk>.

Prior year period, which include the first few months of the pandemic.

Fiscal 2021 revenues declined 13% versus last year to $1.3 billion.

Also driven by decreased revenues from fares domestically and abroad due to COVID-19 restrictions still we believe the sequential improvements in results relative to the third quarter is indicative of the success for our Covid response, and generally improving market conditions operating income for the fourth quarter was $41.6 million versus a loss of 30.

$9.4 million in Q4 of last year for fiscal year 2021, operating income was $39 million.

Versus an operating loss of $32.3 million in fiscal 2020.

Adjusted EBITDA for the fourth quarter was $63.6 million compared.

Compared to a loss of $17.3 million last year, while adjusted EBITDA for full fiscal year 2021 was $139.6 million compared.

Compared to $56.6 million in fiscal 2024th quarter earnings per diluted share was <unk> 90 <unk>.

Compared to a loss per share of <unk> 23 in fiscal 2020.

Full year earnings per diluted share was $1.2 for as a loss per share of <unk> <unk> from the prior year now turning to our segments, where I will review the drivers of our fourth quarter results for fiscal year results are detailed in our tables and SEC filings and.

In children's book publishing and distribution fourth quarter revenue increased 46% to $192.2 million.

While the spring school season denial allows may book fairs, as we had hoped due to continued COVID-19 concerns there were substantially higher levels of in person book fair since the third quarter and in comparison to the prior year's fourth quarter trade revenues grew from the third quarter with an impressive $78.4 million, which had an unfavorable comparison to the prior.

Year period by $2 million.

Only because of the strong sales of Validus songbirds and snakes in the fourth quarter of fiscal 2020.

Fourth quarter operating income was $14.3 million as compared to an operating loss of $46.5 million in the prior fiscal quarter.

In education revenue in the fiscal fourth quarter grew 32% to $124.9 million versus the prior year period education results benefited from a heightened and expanded need for summer learning programs schools and districts increasing book access both at home for book tax distributions and in school through.

Level book room, and classroom collections. In addition to strong demand for teaching resources and digital subscriptions fourth quarter operating income was $40.8 million versus operating income of $27.3 million.

In the fiscal 2020 quarter.

In our international segment fourth quarter revenues grew 47% to $84.3 million versus prior year, our major markets of Canada, and Australia, both had higher sales as did Asia across most channels direct sales trade and education in the fourth quarter International had an operating income of $5.1 million.

Versus a loss of $9.1 million in the fiscal 2020 quarter. We also benefited from certain COVID-19 related wage and rent subsidies of $11.2 million and our international business corporate overhead expense was $18.6 million in the fourth quarter, an increase of $7.5 million versus the prior year period.

Largely due to technology investments and the absence of furlough savings for.

For the fiscal year lower overhead expense overall, $71.9 million versus $81 million in fiscal 2020 is a reflection on the company's cost savings initiatives.

Many of the Companys cost savings initiatives were enabled by the technology related process changes that we've been implementing over the past 5 years.

Regarding our facilities for our headquarters in Soho, a star Walgreen back employees to their working stations as restrictions have been lifted we look forward to even more of our New York based employees collaborating in person as we adjusted and increasingly hybrid environment, which will further enhance productivity as employees benefit from this newfound flexibility.

We will continue to strategically manage our assets as the Manhattan rental market bounces back.

As previously disclosed we sold to surplus facilities in fiscal 2021, and we expect to sell 2 more facilities in fiscal 2022.

Finally, as previously announced the company paid its regular quarterly dividend in each quarter of fiscal year 2021 uninterrupted by the pandemic for a total of $20.6 million.

We are turning the corner on the pandemic in the fourth quarter and continuing into the month of June we have seen strong demand for education solutions as districts principals teachers parents and students prepare for in person learning in the upcoming school year. This includes increased summer reading programs and the replenishing of classroom materials.

For a substantial federal funding available for states districts and schools to spend on education solutions and we are currently experiencing strong demand for our digital and print offerings. Our book fairs team is seeing a similar reaction from their customers who are anxious to host an impersonal scholastic book Fair and Theyre coming school year for ramp up for this business is expected to be.

Actually better from last spring to this fall and then 2 this coming spring as such we are closely assessing our demand and creating capacity when and where we needed for the fall season. This entails reopening distribution facilities that have been closed for over a year in some instances, including hiring and training warehouse and transportation staff members were optima.

Mystic that our book fairs business will recover but we do not expect a full recovery to historical revenue levels in fiscal 2022, and we are managing our resources to meet our expected demand as we come out of the pandemic. We look forward to continuing the company's mission and to grow our business Scholastic now has a more scalable operating model as a result from our cost savings in <unk>.

Grams in both a growing customer base and our global footprint, all resulting in strong cash flow generation, we're investing in digital growth opportunities across e-commerce and online applications as well as pursue numerous strategic solutions to meet the growing need for new digital education solutions adaptable for school and at home to develop and support lira.

C.

In fiscal year 2022, we intend to focus our growth with the following significant opportunities leveraging our IP across platforms direct sales and marketing to parents.

Vesting and long term education solutions growth.

Growth in Asia through English language learning solutions, and the continued simplification of processes.

We're currently borrowing $175 million under our credit facility, but expect to reduce our borrowing levels as our revenues return from fiscal 2022 and receive outstanding tax refunds from the federal government.

We will be negotiating a renewal or extension to our bank credit facility, which expires in January 2020 to the previously mentioned, we expect much of the cost savings we achieved in fiscal 2021 to be permanent adjusted EBITDA will continue to benefit from a lower operating cost base, partially offset by higher inflationary costs for labor.

Materials transportation and other services as well as the discontinuation of Covid related government subsidies were not issuing financial year guidance today. Since there is substantial uncertainty and the expected recovery rate in the course of the pandemic in the coming quarterly calls we will continue to provide additional detail as uncertainties.

Due to the pandemic continued to subside in closing I want to express my heartfelt appreciation for having had the opportunity to work side by side with <expletive> for many years and benefit from his vision and ability to empower his management team to see through this pandemic and continue our mission into the future. We remain focused on the execution of our strategic plan for.

For fiscal year, 2020, which <expletive> along with our board supported when it was approved this past may.

With that I will turn the call over to Peter who we're pleased to have with US for the first time as he prepares to join us as scholastic CEO present welcome Peter.

Thank you Ken it's an honor to be here today Jamie.

Ken and Andy Thank you for your stewardship of Scholastic this summer thank.

Thank you to all of the scholastic employees, who came together to support 1 another on to support our customers during a time of grief on.

At the time that came on the heels of an already tiring year and a half of change. Thank.

Thank you to the board feels supports and faith in me to bring scholastic forward in its second century and finally, thank you to <expletive> Robinson.

Humbling experience to be following <unk> tenure, as CEO and I am profoundly grateful for the opportunity.

Because of his tireless effort to build a company and to cultivate a leadership team that knows teachers families and kids better than anyone else that I am to my new role with confidence that the future is bright.

Scholastic will continue to do what it does best that is to be a partner to schools and families.

Actually all schools are executing expanded pilot plans.

They are also creating back to school plans that continue to need to be nimble because of the effects of COVID-19.

We know that top priority is safety as well as the need to accelerate and learning from last classroom time, while at the same time supporting increased social emotional needs scholastic will remain a trusted brand for families to tend to when that's supporting that children's lending personnel in growth and net short.

Curiosity on the world.

I look forward to speaking to you all again in the future when I can share how we are working hand in hand with educators will tag it to accomplish all of this.

Gil I turn the call back to you for closing.

Thank you very much Peter as a reminder, we invite questions to be directed to our IR mailbox Investor underscore relations at Scholastic Dot Com, we appreciate everyone's time and continuing support and thank you for joining today's call.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Thank you so much joelle really appreciate it.

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