Q1 2022 Scholastic Corp Earnings Call

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Thank you for standing by and welcome to Scholastic first quarter fiscal 2022.

Earnings call at this time.

All participants are in a listen only mode. Please be advised that today's conference maybe recorded.

You require any further assistance please press star zero.

Now like to hand, the conference over to your host senior Vice President Treasurer, and head of Investor Relations, Joe <expletive> off.

Thank you and good afternoon welcome to Scholastics first quarter fiscal 2022 earnings call. Joining me on today's call are Peter Warrick, Scholastics, President and Chief Executive Officer, and Ken Cleary, Our Chief Financial Officer, 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.

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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 is Phil.

Looking statements by their.

Hum 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 Companys earnings release filed this.

Nature and on our form 8-K, which has also been posted to our Investor Relations website, and 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.

Any questions after todays call. Please send them directly to our IR E mail.

I'll address investor underscore relations at Scholastic Dot Com and now I would like to turn the call over to Peter warning to begin this afternoon's presentation.

Good afternoon, everyone and thank you for joining the call today.

To school is always an important time at scholastic and this year that's no different.

In fact, it may be one of the more important moments in our history for many students and teachers, it's been nearly two years since they answer the classroom together.

Just this past week I reached out to more than $2 million of our nation's teachers with a message and a promise to them with scholastic is not only a coastal.

They can rely on but that we're eager to be side by side with them meeting their real time reading literacy and learning needs.

One teacher responded and I quote every day is a new opportunity for my students to staff and learn new things as they Miss so much last school year.

All of us at scholastic couldn't agree more.

As the first quarter of our new fiscal year showed we've nimbly supported educators families with children and literacy and grading.

While this is historically a relatively quiet quarter for the company, we worked with fiber and a clear focus.

To increase access to books and reading over the summer and then seamlessly shifted to back to school offerings to help support learning acceleration and social emotional healing all of these efforts led to a 21% increase in revenue versus prior year.

And an improvement in our seasonal first.

First quarter operating loss, which was reduced by 44% compared to the same period last year.

Trade publishing and education solutions in particular drove positive results for the company and we anticipate continued strength in both of these areas going forward.

Ken will go into further detail.

It's around our first quarter results, but overall, we're pleased that the momentum reported in our business from the close of fiscal year 2021 has largely continued and we are optimistic about this fall.

At the same time, while we are encouraged to see so many children around the world returning to the classroom.

We're staying in close contact with our school partners to ensure that we're well positioned to respond to any changes in the landscape as the pandemic lingers.

Yeah, they're all important to school distribution channels the summer traditionally less active for our company.

However in this unusual yet we use this.

Period is a pulse check to gauge how our customers feel about before.

We know teachers are stepping up to create safe and welcoming environment for their students even as they have concerns around their own wellbeing and making up for lost time in.

In recent weeks, we've seen higher engaged.

Time from our book clubs teacher sponsors and in our book fairs, we've seen higher revenue per fair.

School communities see these experiences is critical pieces of the return to normalcy and supportive of their learning goals as a child sensitive personal choice around books as an empowering experience unique.

Uniquely engages them in reading and that's leading to an energy an appetite to host fast with full bookings running ahead of management's expectations.

Overall, we continue to I expect incremental improvements in a number of case fairs held and remain cautiously optimistic.

Fair trade publishing our exemplary track record continues with top line growth, increasing 27% in fiscal 'twenty two quarter, one compared to fiscal 'twenty one in the same timeframe.

Our content continues to resonate with a success bolstered by creative marketing.

And publicity.

We're also benefiting from strength in connections to patterns as a result of the company's pivots to support families. During COVID-19.

Our recent successes time named three scholastic titles to the list of the hundred best Young adult books of all time.

Getting a nine cells next forthcoming book Kaleidoscope received a shining review in the New York Times, just last week.

We're also you could see families fall in love with JK Rowling forthcoming book the Christmas peak to be published in October.

This title based on pre sales is already a leading best seller on Amazon.

And Birla day list.

Our expertise in helping children navigate the world around them is also enabled by the continued success of titles such as refugee from Alan Grafts and his latest ground zero, which was published in advance of the 20th anniversary of 911.

And that remains no doubt the dog.

Isn't hannon, our graphics Babysitters club.

Cemented this popular draws.

Finally, our strategic growth around leveraging our powerful IP continues to gain traction pop you place a live action scripted series based on our best selling series of the same name by Alan miles Premiers October.

Doc mines on Apple TV plus.

On the heels of an impressive year I'll now formally combined education solutions segment reported an increase in revenue of 49% versus the prior year period.

This new structure brings all of the key strengths of our multiple channels within the segment to the forefront.

Fifth Roselle.

Rosella Mitchell has formed a leadership team that now includes our new Chief academic officer, former interim Chancellor of D. C public schools Doctor Amanda Alexander.

As well as fresh expertise in product development and digital marketing to help design and position solutions to meet the immediate.

From a educators, while planning for the future growth.

While keeping the benefits of our tried and true whole school in classroom library collections, which pivoted exceptionally well during the pandemic with grab and go packs. We also saw high performance from our digital product suite, which now includes the universe.

Need blacks S teacher dashboard as well as the new bilingual and blended pre K curriculum.

In responding to the needs of a hybrid market.

12 classroom magazines have continued to innovate and our rebranded of scholastic magazines plus signaling to our customers increasingly flexible in design.

Xyrem or mix of both print and digital features as well as instructional tools to use in person or remotely.

All of this is unfolding against the backdrop of landmark federal funding for K 12 schools to support the learning acceleration of our students.

In international the decrease in revenue.

This past quarter is a reflection of how and where Covid has caused you all continued disruptions similar to the U S. We anticipate that as restrictions lift our recovery will resume in these disrupted areas and we will simultaneously continue to focus on our growth opportunities in Asia.

I.

Spent the past two months listening to my colleagues and deeply engaging in my new role as CEO.

As I have been inspired by the Scholastic mission during my tenure as a board member and now stand impressed by what I've witnessed firsthand from our employees in that day to day work.

We're committed to our mission we have in parallel.

Parallel content proprietary distribution and we have deep relationships, all making our company unique in our ability to serve children.

And this coming year, we're energized to meet the clear demand, we're seeing for our offerings.

Evidence that while we won't reach pre pandemic levels in the near term book fairs or.

<unk> eyes, and educators are eager to refresh their classroom libraries throw our collections as well as through our clubs and they are delighted by our expanded offerings.

We will need to navigate ongoing industry wide challenges that could potentially affect our performance such as labor shortages supply chain issues.

On the re procurements in both inflationary and Covid related pressures.

We continue to believe that our previous cost saving actions and the identification of strategic measures will significantly mitigate these effects.

Finally, I'd like to welcome our newest board member per DAU Walker head.

Kids audio content to Spotify, Inc. Elected yesterday during our annual shareholders meeting.

<unk> brings a shared passion for brilliant content creation for children and a prominent career in the area of children's Entertainment and media.

Our point of view and I for modernization will surely be a beneficial.

<unk> to our board.

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

Thank you Peter good afternoon today, I will referred to our adjusted results for the first quarter, excluding onetime items unless otherwise indicated.

Please refer to our press release tables and SEC filings.

Additionally, discussion of one time severance and legal settlement costs.

We start the new fiscal year, and our school teacher parent and student customers return to in person learning.

Faced with both opportunities and challenges as Peter mentioned, our first quarter is typically quiet for a school book fairs and book clubs channels. However, a strong performance in our education solutions.

For a complete trade channels drove first quarter revenues to $267.0 million compared to $217.0 million last year.

Operating loss in the first quarter was $38.0 million compared to an operating loss in the prior period, a $45 million adjust.

Adjusted EBITDA for the first quarter was a loss of.

<unk> million dollars compared to a loss of $24.0 million last year and a loss per diluted share was <unk> 79, compared to a loss per diluted share of <unk> 90 <unk>.

In the prior fiscal quarter.

Volume significantly outpaced higher employee related costs in the current period.

<unk> costs were lower than the prior period.

<unk> is our employees were on furlough or reduced work week due to COVID-19 related actions through the end of August of last year.

While our employee costs were higher than last year, we're pleased to see the uptick in our productivity and our cost containment efforts initiated last year continue to provide operating leverage as we have lowered our and.

<unk> ongoing operating costs by approximately $50 million from historical levels and we are on track to achieve these savings.

The company generated positive free cash flow for this quarter of $50.0 million compared to a free cash use of $43.0 million in the prior period largely due to the receipt.

Receipt of a federal tax refund was $64.0 million borrowings under the company's domestic credit facility are now $75 million, reflecting the pay down of $100 million in the current quarter now turning to our segments in children's book publishing and distribution first quarter revenue increased 20.

Percent to $123.0 million versus the prior year period trade revenues grew $26.0 million due to strong sales of our series publishing and strong backlist titles, including higher sales of Harry Potter box sets and limited edition foil covers for dog man driven by marketing.

Five prime publicity activities.

While the first quarter is not traditionally a significant quarter for our school based distribution channels. We are seeing strong demand our schools begin to reopen this fall with book clubs sponsor activity on the rise and book Fair bookings increasing sequentially. This poll from last spring first.

Segment operating loss was $28.0 million as compared to an operating loss of $29 million in the prior fiscal quarter.

And education solutions revenue in the first fiscal quarter grew 49% to $81.0 million versus the prior year period.

Segment results benefited.

<unk> from increased demand for our summer learning offerings and higher sales for supplemental and core instruction products, especially in the newly launched early childhood program pre K on my way.

Digital product subscription sales also increased in our magazines plus products experienced improvement with a 13%.

The increase in sales of subscriptions, which will benefit the company in future quarters.

First quarter segment operating income was $10.0 million versus an operating.

Operating loss of $6.0 million in the prior fiscal quarter driven by the record sales in our international segment first quarter revenue has decreased 8% or five.

Presenting $1 million versus prior year.

Australia experienced new Lockdowns due to Covid variant, which caused interruptions to our local markets and in classroom learning.

The pandemic also continuing to negatively impact our markets in New Zealand as well as the direct sales business in Asia.

In addition, the majority of the Covid.

<unk> related wage and rent subsidies have ended or had been reduced from prior year levels in the first quarter International had an operating loss of $4.0 million versus operating income of $13.0 million in the prior fiscal quarter.

Corporate overhead expense was $25 million compared to $23.0 million.

Remaining relatively flat as the company continues to closely monitor discretionary spending.

As we look to the remainder of the fiscal year. We are encouraged by strong demand signaled by our customer base as they return to in person learning we.

We're matching our capacity to this increased demand and difficult supply chain and labor.

Yeah.

Our trade channel continues to have strong frontlist and backlist titles with 19 of our books currently on the New York Times Best seller list.

Additionally, the company is seeing substantial preorders for JK Rowling the Christmas pig, which will be released in October and expect strong sales of Dave <unk> second installment.

In the Cascade common clubs series, which will be released November 30.

Costs have increased for product printing and paper across all of the company's channels. In response. The company is continuing to diversified supplier base, including increased North American sources is actively planning manufacturing activities.

Markets aren't available paper supplies procurement lead times have increased and we are ordering product as early as possible to meet our increased demand. Our book fairs channel is seeing substantially higher bookings for this fall than we experienced last spring we have reopened our 43 book fair distribution facilities from Covid related closures.

<unk> and are on track to meet our warehouse and driver staffing requirements.

During the summer the company initiated an intensive hiring plan.

Book Fair distribution facilities inclusive of higher wages and other employee incentives to ensure that we achieve the capacity requirements to deliver fares to our customers.

Demand.

For our book clubs offerings. This September has also increased from early last year when many schools were closed.

Our teacher parent and student engagement is leading to increased order quantities.

The company has sufficient product to meet this increased demand.

Warehouse staffing resources at the company's Jefferson City, Missouri facility are.

Our limited as a result, we have experienced some current backlog of orders for our book clubs channel.

The company has recently increased its efforts to staff this facility inclusive of higher wages and employee incentives we.

We expect to work through the backlog over the next few weeks education solutions continues to see strong.

Demand for in classroom materials, and digital content bolstered by new products and need for digital content and functionality and our customers access to federal funding.

The second and third quarters of the year generally produce lower sales volumes for education solutions.

Our international segment expects effects of the pandemic to continue.

<unk> into our second fiscal quarter in Australia, New Zealand and Asia.

Australia, New Zealand are experienced significant lockdowns and school closures.

In the UK school channels are returned to a more normal school year, albeit not a pre pandemic levels.

Additionally, the company is providing new offerings towards China franchise customers.

In response to recent government regulations.

The company expects strong cash flow to continue into the second quarter and the remainder of the year. In addition to the $64.0 million Federal tax refund. We also received an insurance settlement of $12.0 million from the primary insurance carrier of our recent 20 million.

Legal settlement, which we paid in early September.

Full year cash flows will benefit from the continuing collection of trade and education solutions receivables and the return of higher revenues from our school channels.

Cost savings from last year's initiatives will be partially offset by higher cost for product paper printing.

Printing transportation and labor.

Given the strong cash flow forecast, we anticipate sufficient liquidity for debt repayment and our share buyback program.

We're in the process of negotiating a new credit facility consistent with the Companys expected needs as the current facility expires January five 2022.

Thank you for your time with US this afternoon and your interest in scholastic with that I will pass the call back to Gil for closing. Thank you very much Ken 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 as always thank you for joining today's call.

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

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