Q2 2022 Scholastic Corp Earnings Call
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Good day, and thank you for standing by and welcome to Scholastic reports Q2 fiscal year 2022 results conference call. At this time, all participants are in a listen only mode.
Be advised that this call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your host today Gil <unk> Senior Vice President and Treasurer and head of Investor Relations you may begin.
Hello, and welcome everyone to Scholastics fiscal 2022 second quarter earnings call.
Joining me on the call today are Peter Warrick, our President and Chief Executive Officer, and Ken Cleary, Our Chief Financial Officer.
As usual, we have posted the accompanying investor presentation.
Our website at Investor Scholastic Dot Com, which.
Which you may download now if you have not already done so.
We 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 and its variance on the company's business operations.
These forward looking statements by their nature are uncertain and actual results may differ materially from those currently anticipated. In addition, we will be discussing some non-GAAP financial measures as defined in regulation G.
Reconciliations of those measures to the most directly comparable GAAP measures maybe found in the company's earnings release and accompanying financial tables filed this afternoon on a form 8-K.
Earnings release has also been posted to our Investor Relations website.
We encourage you to review the disclaimers in the release and Investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC.
Should 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 now I would like to turn the call over to Peter Warrick to begin this afternoon's presentation.
Good afternoon, everyone and thank you for joining the call today.
Hope you reach enjoying this holiday season, which in many ways feels closer to normal even as we remain watchful of Covid developments.
The ongoing balance of moving forward in a new normal while continuing to remain cautious made a second quarter, especially meaningful this year.
We've stayed in close touch with families and educators as they navigated the new school year Thankfully for the most parts finally back in the classroom.
Sure. These insights throughout the company, while increasing our reach in fact this fiscal year to date, we've increased our parent reached through email by almost six fold.
And as we've seen throughout our 101 year history. It's this deep relationship yet again contributed to positive results because of our ability to meet real time needs to evolve.
All of these efforts that to a 29% increase in revenues and an approximately 30 million dollar improvement in operating income while Ken will provide you with specific details of our second quarter results.
To address what I expect is the uppermost question in most People's minds, given our experience with Covid during the past 18 months or so and that's the question.
Our our books has back.
And I'm pleased to say that yes, our book fairs business is coming back as with all Covid impacted businesses. Our optimism comes with caution due to the unpredictable nature of the virus, but overall, we believe we have made significant steps in moving beyond the pandemic and with the confidence the board repeat.
[noise] Widescale school closures or unlikely we have systems in place to manage through it all we've.
We've not yet reached pre pandemic levels of books had bookings, which was not in our outlook. However, we have exceeded our expectations with higher than anticipated revenue with that significant increase in revenue per fair as well as the demand for scholastic book clubs tells us that our customers agree that getting books in the ends of kids.
As a priority as we all remember from the pandemic.
Related to book clubs. This is why we've been less deeply affected by the industry wide labor shortage. Additionally affected by discrete system issue, a large backlog of orders, which we continue to address has been diligently work done by our staff to our Jefferson City warehouse.
We're also staying in close contact with customers to offer digital opportunities to enhance literally experiences in the classroom as they await their orders.
I had the pleasure of visiting our flagship warehouse myself this past quarter and I must share the staffs dedication to the scholastic mission and fulfillment of these orders is second to none.
Impressed and grateful for the warm welcome. They provided thank you one and all your continued work this holiday season.
In trade, we closed the quarter with the release of the new graphic novel Cap Kids comic clubs perspective. This is the second titling day pillar is new worldwide best selling series and made available just in time to be a holiday gift.
And speaking of the holidays, the Christmas peak remains on top of our bestseller lists.
We're pleased to see many year end favorites and gift giving lists include AR titles, such as wishes, which alone has been included on the floor.
And we have much to be proud of but theres no equal among graphic novels publishes according to Bookscan graphics accounted for 40% of all graphic novel sold in 2020, and we also remain a runaway leader in the overall category of children's book series.
Notably this quarter also brought the world a long awaited release of the live action Clifford the Big Red Dog movie from Paramount.
Audiences have fallen in love with epilepsy character all over again.
Rediscovering Bulks success.
The success of our strategy in Reenvisioned, how we diversify our IP initially through the 2014 Relaunches Scholastic Entertainment is exhibited by a 30% increase in Clifford U S trade sales since the animated reboot released Clifford movie tie in graphic novel.
Carried in book clubs and fast is exceeding expectations in sales through our school channels.
I mentioned is growing.
Seen from numerous announcements such as the forthcoming Clifford sequel from Paramount and with partners, such as Apple TV plus legendary television.
Scholastic Education solutions continues and as transformative approach to supporting our school customers.
Our new channels of revenue are gaining traction in the market, including our curriculum offering pre K on my way and in digital with Scholastic literacy pro and Scholastic first formerly known as Oak Island. These offerings from education solutions are critical to supporting literacy skills for countless classrooms also.
The positive response seen cause district wide sales of our culturally responsive book collection.
Rising voices library displace the needing classrooms for more diverse content and instruction to need that we're eager to continue to meet.
In international we continue to see the impact of the ebb and flow of the pandemic throughout the globe in Australia, our business is coming back from the most recent SGR and we have the inventory on hand that to meet demand.
In Asia disruptions contributed to a decrease in demand and we continue to navigate new regulations in China.
We are optimistic that our results will continue to show the demand for our content and display the long term benefits made possible by previous investments in technology and infrastructure through our 'twenty 'twenty plan, which enabled us to launch new tools for sales team optimization inventory management.
Our new order entry to name a few.
Much of our ability to manage vital change to serve schools and families joined the pandemic, while managing both expected and unexpected costs is the direct result from this initiative setting a path forward for us to continue to shape and prepare scholastic to ultimately reach our second century.
In the second half of this fiscal year, we look forward to being an exemplary partner to schools and parents, but our independent reading needs through high quality content and education materials, while providing a sense of normalcy by meeting the demand for our clubs and fairs.
We will continue to provide high quality fast while increasing the number of paths held as our capacity in fact quality continued to improve.
And we are poised to recover from our operational difficulties in clubs this upcoming spring season.
In trade, we will release, the highly anticipated cat keep comic clubs three on purpose by Dave silky.
And wings of fire 15, the flames of hope by TUI Sutherland and our pre K brand make believe ideas will continue to widen our appeal by expanding its retail presence intersections traditionally reserved for the toy market.
The formal combination of our previously separate education magazine divisions.
The streamlining of marketing focus growth on new revenue opportunities and has laid the foundation for future offerings.
And while challenges remain in our international business, we have the talent and content to work through these.
In closing our mission to serve all children through literacy and learning continues to be our North star. We've used this time to build momentum and renewed energy towards more efficient and effective ways of doing things.
Entering all our various offerings around our customers.
Ruth pointing out our enhanced cross divisional collaboration is our recently announced five year partnership with the University of Florida last thing our center for learning and the state of Florida to execute the new Wells Reading initiative.
Through monthly home book deliveries. The program has the potential to reach up to 500000 children statewide who are currently reading behind grade level.
While the revenues and profits will be modest in the startup here, we expect the program to grow with roughly 70000 kids already enrolled.
Bringing the expertise of our divisions together to create the winning proposal in Florida truly displace the power of using all of our resources together in a new way to achieve our mission with.
With a shared vision a strong management team will ensure our future success by enhancing collaboration and changing the way our divisions interact and movement, which we anticipate to be accelerated as we welcome Mary Beech as chief marketing and transformation officer.
We're eager to begin our work together this January and we think Mary for insights during that time on the board.
More information about a successor board member will be shared with you when we can.
And with that I'd like to turn the call over to Ken Cleary.
Thank you Peter and good afternoon today, I will referred to our adjusted results for the second quarter, excluding onetime items unless otherwise indicated.
Please refer to our press release tables in our SEC filings for a complete discussion of one time costs and legal settlements.
We started the school year with strong demand across all of our channels, but most notably in our book fairs channel, where the pandemic essentially shut us down at the started the prior school year our.
Our trade channel continued to dominate bestseller lists and our education solutions business had strong results as well.
We are experiencing higher costs for labor and product in our book clubs channels. The scarcity of labor led to delays in the shipment of product to our customers.
The pandemic continue to impact some of our foreign operations normally in Asia, Australia, and New Zealand.
Overall, we are very pleased with our results, which exceeded our expectations.
Revenues for the second quarter grew to $524 $2 million versus $406 $2 million in the prior year period.
Operating income in the second quarter was $84 $3 million versus $54 $3 million last year.
Net income was $69 million compared to $39 $4 million last year.
Adjusted EBITDA was $113 $7 million compared to $77.7 million in the second quarter last year, earning.
Earnings per diluted share was $1 93, compared to $1 15 last year.
Net cash provided by operating activities was $78 million compared to $46 $1 million in the second quarter last year.
Free cash flow for the quarter was $75 $4 million.
Impaired to $30 $9 million last year.
For the six month period net cash provided by operating activities was $141.6 million compared to $20 $1 million in the prior year and free cash flow was $124 $5 million in the current year compared to a free cash use of $4 million last year, an improvement of $128 5 million.
Reflecting the company's recovery from the pandemic the cost savings initiatives implemented last year in our first quarter tax refund.
At the end of the quarter cash and cash equivalents exceeded total debt by $286 $4 million compared to $161.8 million at the end of the second fiscal quarter a year ago.
Capital expenditures and capitalized prepublication costs in the second quarter were $13 million compared to $15 $2 million last year.
This limited spending was focused on our technology platforms and digital products and services.
Domestic inventory purchases for the fiscal year of $172 $4 million increased $20 $7 million over last year's purchases, but still remain substantially below historical levels as the company was able to leverage inventory on hand, and continues to improve processes and tools to manage inventory levels as demand changes.
Given the strong cash flow in October we paid down the remaining 75 million of borrowings under our revolving credit facility, which we renegotiated and extended during the current quarter, increasing our borrowing capacity to $300 million under the facility.
Also in the second quarter, we restarted our share buyback program, which we suspended at the outset of the pandemic.
Through today, we have reacquired over 134000 shares for $5 million.
Now turning to our quarterly segment results.
In children's book publishing and distribution, our biggest objective for the fiscal year. The recovery book fairs business heading out of the pandemic. Unfortunately, almost all U S schools. This year open for in person learning and book fairs revenue of $176 $2 million exceeded the prior period revenue of $47 $7 million or <unk>.
Person fairs execute for the fall season are now approximately 70% of fall of calendar year 2019, pre pandemic levels as demand for our school fares are strong and ahead of our expectations.
We have also used the time during the pandemic to improve our data analytics capabilities more closely mirror, our book fairs customers' needs and dryer driving higher traffic at in person book fairs.
And as Peter alluded revenue per fair has increased 12, 3% on a same fair basis, when compared to pre pandemic levels in the full calendar year 2019.
We expect the spring season to increase sequentially from Nepal, albeit at a slower pace than the sequential increase seen in the current period as we continue to closely match our capacity with our demand.
Trade continued its strong run as revenues of $124 $4 million modestly trailed the prior period revenue of $129 $3 million, which include the release of J K Rowling Knickerbocker.
Strong performance from Frontlist releases were bolstered by continued strong demand for the backlist titles and our onscreen adaptations furthered scholastic brand awareness and drove front and backlist product sales.
Book clubs revenue of $51 $9 million trailed the prior period reported revenue of $67 million. The decline in revenue was not the result of a lack of demand as orders for the period were ahead of our expectations labor shortages at our primary distribution facility in Jefferson City, Missouri combined with system.
Mentation growing pains led to a backlog of orders.
As of November 30 of 2021 our back orders for book clubs stood at $21 $3 million or $18 $4 million higher than the same time last year.
Our distribution facility has increased wages and incentives and now has sufficient warehouse associates expects to work down this backlog early in the new calendar year.
Total children's book publishing and distribution revenues for the current quarter of $352 $5 million greatly exceeded the prior period revenues of $244 million and operating income of $85 $2 million exceeded the prior period operating income of $35 $4 million as a result of the increase.
Revenues.
Education solutions has strong quarter with revenues of $79 $5 million exceeding the prior period revenues of $67 $5 million.
Operating income performance was stronger still with quarterly operating income of $15 $6 million exceeding the prior year performance of $10 $3 million.
Magazine revenue and subscription rates have come back strong post pandemic.
Revenue from magazines exceeding the prior year by $2 $7 million.
As incremental magazine subscriptions, which have a digital component have low marginal costs. These revenues greatly add to the bottom line.
Digital revenues approximate budget and prior year, while teaching resources, which benefited from the pandemic receded to pre pandemic levels.
Digital product gross bookings for the full year are ahead of last year's pace.
<unk> mentioned the company continues its focus on diverse voices and Republishing with strong sales at rising voices highlighting in the quarter.
International segment revenues of $92 $2 million trailed the prior period revenues of $94 $7 million.
Operating income of $9 million likewise trailed the prior period of $19 $5 million.
Prior year operating income included $2 $8 million of Covid related government subsidies.
Canada's rebounding well from a pandemic our schools across Canada are largely open.
The UK operation School channels are slower return to normal in Canada or the U S.
Australia, New Zealand, so widespread lockdowns in the current year that they did not experience earlier in the pandemic and as a result had substantially lower revenues compared to the prior year second quarter.
November restrictions begin to lift in Australia.
Now beginning to ease in New Zealand.
Vaccination rates increased dramatically.
Sales across Asia were down from the prior period.
Struggles were twofold first COVID-19 restrictions hindered the direct sales business throughout Malaysia, Thailand, and second Chinese government restrictions around tutoring and foreign content drove down revenues from China as the company its distributors and customers continuing to work through these new restrictions.
Unallocated overhead costs of $25 $5 million exceeded the prior year unallocated costs by $14 $6 million.
Increased wages and related costs at the company's Jefferson City, Missouri distribution facility resulted in $5 6 million increase over the prior period.
Higher accrued bonuses and litigation settlement of $1 $3 million also contributed to the increase.
In the quarter, we continued our optimization of workspace by selling or office and warehouse in Lake Mary, Florida, recognizing proceeds of $10 $4 million and a gain on the sale of $6 $2 million and also entered into an agreement to sell a company owned distribution facility. The U K with net proceeds to be realized.
<unk> in March of 2022.
Last year, we're able to dramatically reduce costs in the face of the pandemic.
During the years preceding the pandemic, we execute on our 2020 plan are mostly technology driven program designed to reduce costs and allow for more efficient processes and better product and customer data analytics. The 2020 plan resulted in the implementation of new tools and processes that enable us to save over $100 million.
During the year of the pandemic and an estimated $50 million annual reduction in our cost base.
Additionally, the move to cloud based systems enable us to remain connected and work seamlessly while working remotely throughout the pandemic.
This foundational work will continue to benefit us as we move forward.
We now have new variable cost challenges in the form of inflationary pressures for product transportation and labor.
Product costs were printing paper and inbound freight have increased our per unit costs by approximately 15% of pre purchases made this year.
Much of our inventory for the first half of the year was procured in prior periods, a lower costs, particularly for the book Fairs Division.
Therefore, our cost of product recognized to date do not fully reflect these higher costs. Additionally.
Additionally, variable labor costs across the whole company, but most notably in our primary distribution center in Jefferson City, Missouri have increased as much as 20% or more.
Likewise postage and outbound shipping costs have increased dramatically.
We are addressing these variable cost increases near and longer term through proactive resource allocation diversifying our vendor base automation pricing and product rationalization.
New Covid variance notwithstanding we are optimistic about future results. We are encouraged by the success in the first half of the year.
Like our industry peers, we have cost and supply chain issues to overcome for the remainder of the fiscal year.
However, we have more good news and challenges and much of our previous work will enable us to better navigate these obstacles.
Finally, as previously announced the company approved its regular quarterly dividend of <unk> 15 per share.
Thank you for your time today have a happy holiday and I will now hand, the call back to Gil.
Thank you Ken as a reminder, we invite questions to be directed to our IR mailbox Investor underscore relations at Scholastic Dot com.
Appreciate your time and continuing support and wish you a very enjoyable and safe holiday season ahead.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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