Q3 2022 Scholastic Corp Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Scholastic fiscal 2022 third quarter earnings call. At this time, all participants are in a listen only mode.
Please be advised this call is being recorded.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your host today, Paul who can and Chief accounting Officer and Investor Relations.
You may begin.
Hello, and welcome everyone to Scholastics fiscal 2022 third quarter earnings call. Joining me on the call today are Peter Warwick, Our President and Chief Executive Officer, and Ken Cleary, our chief financial.
Officer as usual, we have posted the accompanying investor presentation on our IR website at Investor Scholastic Dotcom, which you may download now if you've not already done so well.
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.
The reconciliations of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and accompanying financial tables filed this afternoon on form 8-K.
This 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 invest.
Underscore relations at Scholastic Dotcom.
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, well, that's what we hope to be promising news in moving past. The pandemic were of course deeply saddened unconcerned by the events unfolding in Ukraine.
We had been for more than a century, we're focused on how we can support children and decipher in these challenging times.
Our expert team of writers and editors at scholastic magazines, plus immediately creating tailored materials to help teach us facilitate classroom conversations appropriately.
We also have a number of trade book titles, such as Alan Graf sees refugee, which can be starting points for children at home or in school to begin to understand what this experience may be like for displaced families with kids.
Continue to listen to teachers parents and children to learn what they need and execute our mission by being a timely and reliable resource for them.
From an operations perspective, while our financial exposure is limited we have suspended any business dealings with Russia.
Turning to our third quarter fiscal year 2022, a number of continuing themes drove positive momentum around scholastic our intellectual property continues to lead the industry and in many cases crosses over audiences regions and media increased demand for independent reading is bolstering our business.
This book fairs are back and growing providing a renewed sense of normalcy in schools loyalty to book clubs remained strong and unified approach to the education business increased opportunity and has grown revenue and finally customers and stakeholders continue to turn to us now.
That's how committed and mission driven employees will meet their needs as they re emerge from the pandemic, Ken will provide greater detail as usual, but I am pleased to share that revenues for the third quarter grew 24% to $344 5 million versus 207 to 7.5 million and the prime.
Year period now.
Now I'd like to walk you through highlights from our segments. This past quarter and areas that we're looking forward to in our all important quarter for <unk>.
In trade has written a bathroom publishes weekly daily pill key led a number of lists in 2000 and twenty-one stockman Mothering Heights was the overall top selling book with more than 1 million copies sold Dogman crime and punishment also stay strong and the newest title tap kids.
Clubs perspectives was high in the hard cover Frontlist category.
In the same category J K Rollings, the Christmas peak came in at number five and Harry Potter continues to rank well trial lists.
We also have exciting activity in the world of film television and streaming Heron Blade is the bad guys are highly anticipated animated feature with Dreamworks debuts in April this series, which originated with US in Australia remains an excellent example of the strength of our international book publishing to capture these.
Tension of children throughout the world.
And our own Scholastic entertainment continues to bring a backlist intellectual property to the forefront with a number of production announcements such as the recently Green lit live action series of Goose bumps with Disney plus and season two of still water on Apple TV.
Overall this activity not only raises the potential of our backlist, but also strengthens our opportunity for licensing.
All of these engaging titles in combination with a curated selection of books from publishers worldwide translate into an unparalleled distribution channel and our fairs and clubs business as we shared in December.
<unk> come back in quarter, two exceeded expectations and we are pleased to report this positive trend has continued.
We're maintaining 70% of our pre pandemic levels of in person fast revenue per fan remains strong and it's been great to see the joy expressed by children and adults alike, who are thrilled to have the Fas experience come back to their schools.
As I noted earlier, our book clubs business is seeing a clear demand for independent reading and continued loyalty from teachers.
Negative impacts from the industry wide labor shortage and a previously disclosed systems issue did impact quarter, three but I am pleased to say that thanks to our diligent employees and management of the labor issue a backlog from the fall is fully rectified and all critical systems issues have been addressed well we mitigate any.
Issues, we've resumed our standard day to day processes and we're returning to the service levels are cut.
<unk> expect and deserve and dedication to the literacy journey for each child is what truly sets us apart in the industry, Our education solutions division, perhaps to that mission by creating high quality book collections reading curricula and Printon digital instructional tools for U S schools and districts.
Our company was founded on magazines and 1921 are now 101 years later, I think you'd be hard pressed to find a magazine success story leveraging printing digital experiences comparable to scholastic in relevancy and reach this month, we announced the expansion of our titles to meet increased demand for <unk>.
High quality materials magazines, plus launched preorders for the highly anticipated story works, one which will first ship in fiscal 2023 and now creates a full line of story works English language arts titles for grades one six making it an important whole school offering aligned to <unk>.
Standards for any U S Elementary school.
Pairing our deep expertise in reading with our ability to involve keep sell magazines strong unprofitable as we continue to advance from print into a highly interactive digital experience overall, our education solutions segment is performing ahead of expectations with continuing momentum around our curriculum and did.
Little offerings summary.
Some are reading remains at the forefront of needs of more educators, who are working to accelerate learning and to catch up from lost time due to the pandemic.
The environment remains unpredictable due to both COVID-19 and because of the varying size and accessibility of district and school funding channels, but our longevity and expertise as well as our experience with market cycles positions us well for the demand in quarter, four which is historically a high volume period in <unk>.
International as I mentioned earlier, we continue to see strength in our publishing with standouts from Australia based IRA Blaby and the global response to U S based day pill key.
In the U K, Tom Gates as latest titles performed well and is brand extends to sky TV and merchandise.
<unk> of publishing our international fairs, and clubs businesses continue to work their way through the impact of Covid.
In Asia, we're working closely with our franchise partners and our direct to home team to manage costs and better understand new regulations in China.
Finally, a brief update on our cross divisional collaboration the new Wells Reading initiative with the state of Florida, and the University of Florida, less danger center for learning.
This past quarter, we surpassed the milestone of 100000 children, having signed up for home delivery of books to promote independent reading.
This is a remarkable achievement in such a short time with 350000 book shipped since we started in December.
To execute this five year partnership, which we expect will only grow in its reach we've opened a new distribution facility in Florida.
Overall scholastics positive results. This fiscal year to date have benefitted from the long term effects of our previous investments in technology and infrastructure as well as the enduring expertise and passion of our employees and the ongoing loyalty of our customers we.
We enter the final quarter of our fiscal year with strong and solid momentum driven by a thoughtful strategic vision rooted in our enduring educational mission.
Look forward to sharing more with you in the future on forthcoming titles initiatives and offerings.
And with that I'll now turn the call over to Ken.
Thank you Peter and good afternoon today, I will referred to our adjusted results for the third quarter, excluding onetime items unless otherwise indicated please refer to our press release tables and FCC filings for complete discussion of one time items, while the third quarter is seasonally quieter than either the second or fourth quarter's book fair experienced a strong fall.
Season started the spring season on the same trajectory.
Book clubs has recovered from operational issues created by labor shortages in software implementation issues and seeing demand recover early in the spring season edgy.
Education solutions are typically quiet third quarter was building inventory to meet expected demand in the fourth quarter. Our trade child continues to dominate bestseller lists as Peter discussed international operations continued to be negatively impacted by pandemic related difficulties in Asia, We're starting to turn the page on the pandemic in Australia and New Zealand.
Overall, we are very pleased with our results and our preparation for future growth.
Revenue for the third quarter grew 24% to $344.5 million versus $277.5 million in the prior year period.
Operating loss in the quarter was $16.7 million.
Versus $11.9 million last year, net loss was $13 $2 million compared to $4.8 million last year, and adjusted EBITDA was $5 $9 million compared to $14.2 million in the third quarter of last year.
Loss per diluted share was 38 cents compared to <unk> 14 cents last year.
Net cash provided by operating activities was $36.9 million compared to $16.4 million in the third quarter of last year free cash flow for the quarter was $23 $4 million compared to $5.5 million last year, demonstrating continued discipline and increase revenues on a lower cost base.
For the nine month period net cash provided by operating activities was $178 $5 million compared to $36 $5 million in the prior year and free cash flow was $147.9 million in the current year compared to a free cash flow of $1.5 million last year and improvement.
Of $146 $4 million, reflecting the company's continued recovery from the pandemic the cost savings initiatives implemented last year.
And our first quarter tax refund.
At the end of the quarter cash and cash equivalents exceeded total debt by $295 $2 million compared to $162.5 million at the end of the third fiscal quarter a year ago.
Capital expenditures and capitalized prepublication costs in the third quarter were $13.5 million compared to $16 million last year.
Mastic inventory purchases for the fiscal year of $262 million increased $65 $7 million over last year's purchases as the company was able to leverage older inventory for the first nine months of this fiscal year due to the supply chain difficulties. The company is currently ordering inventory well in advance of anticipated.
Man why them for longer manufacturing and transportation lead times newer tools and processes are providing better insight to demand planning and fulfillment, enabling more efficient and cost effective procurement.
Quite the longer lead times.
In the current quarter, we continued our share buyback program, which was suspended at the outset of the pandemic through today, we have reacquired 498000 shares for $19.8 million.
This includes a privately negotiated transaction with the related party of 300000 shares were $12 $2 million at a discount to market prices.
Our cash and liquidity remains strong and we expect to continue open market repurchases of our shares for the foreseeable future.
Now turning to our quarterly segment results in children's book publishing and distribution book Fairs continues its strong recovery from the pandemic.
Fair revenue was $76 million exceeded the prior period revenue of $27 million.
Our in person fairs execute from a fall season I've now reached approximately 70% of all of calendar year, 'twenty 19, pre pandemic levels and we expect the recovery to continue at this rate for the upcoming spring season.
Equally important our revenue per fair has increased 13% on a same fair basis, when compared to pre pandemic levels in the fall of calendar year 'twenty 90.
While we expect the spring season fair count to increase modestly from the fall, we anticipate that revenue per fair will be down from fall levels in line with typical spring season performance.
Hi, Fair quality remains our primary objective and we will limit fair count where necessary to ensure that we have continued to deliver the best possible fair experience to our customers.
Trade continued its strong run as revenues of $84.5 million exceed the revenues of $88 million in the same period, a year ago, an increase of 4.6% largely driven by strong demand for backlist titles as our series publishing continues to resonate with young readers.
In the prior year's third quarter, we released a pill keys first cat Kid comic clubs title followed by the second titled This past November we expect to release the third title in the series in April.
Third quarter book clubs revenues of $40 $5 million exceeded the prior year's comparable period reported revenue of $35 $1 million as we worked down the bulk of our previously discussed backlog in December.
Labor shortages that are primary distribution facility in Jefferson City, Missouri have now been resolved as we have increased wage rates to attract warehouse associates.
While book clubs revenues are down on a year to date basis, we expect demand to recover in the spring as teacher and parent engagement remains strong.
Total children's book publishing and distribution revenues for the current quarter of $201 million exceeded the prior year's period revenues of $142.9 million and operating income of $5 million improved over the prior year's period operating loss of $4.7 million as a.
Bulk of the increased revenue and cost containment efforts education solutions had a solid quarter with revenues of $77 $2 million exceeding the prior year revenues of $66 $3 million quarter.
Quarterly operating income was $13 $1 million exceeding the prior year performance of $9.7 million as Peter mentioned, we have commenced execution of our distribution contract with the state of Florida, which is now fully operational and operating within this state which accounted for $5.7 million of revenue in this fiscal year's third.
Quarter magazine, plus revenue and subscription rates have come back strong post pandemic.
With quarterly revenue from magazines exceeding the prior year's third quarter by $3 4 million docs.
Digital revenues were on par with the prior year's comparable quarter, while teaching resources, which was in high demand. During the pandemic continued to trail. The prior year and has returned to historical levels in the prior year education solutions experienced a strong fourth quarter as demand for summer reading during the pandemic and the need to replenish.
Classroom libraries drove demand.
In this year's fourth quarter, we expect continued demand for summer reading, albeit not quite at last year's levels and increased demand for diverse titles such as those within the rising voices collections.
A liberty of these products is likely to straddle the fourth quarter of the current fiscal year and the first quarter next fiscal year International segment revenues of $66.3 million trailed the prior year's period revenues of $68 $3 million operating loss of $4.6 million was unfavorable to the prior year period loss.
Of $800000 prior year third quarter operating results include $2.1 million of Covid related government subsidies Tanner.
Cana continues its pandemic recovery with revenues up $3.2 million in the quarter led by increases across all channels. You case operations revenues increased $200000 in this year's fiscal quarter, driven by the resurgence of book fairs, Australia.
New Zealand saw widespread lockdowns in the current year, but began to recover in November December as restrictions lifted resulting in relatively flat sales for the third quarter say.
Sales across Asia were down $4.2 million in the third quarter from the same period last year.
<unk> continues to struggle with Covid restrictions and government regulations in China around tutoring and foreign content unallocated overhead costs of $30 $2 million in this year's fiscal quarter exceeded the prior year's third quarter unallocated costs by $14.1 million higher wages and related costs of the <unk>.
Companies Jefferson City, Missouri distribution facility resulted in $7.6 million of the increase in the period.
Higher accrued bonuses benefit costs and consulting costs also contributed to the increase as mentioned in previous calls we are on track to achieve the $50 million of permanent savings as a result of last year's cost containment initiatives.
Much like everyone else, we face inflationary cost pressures for product transportation labor and fuel.
<unk> costs for printing paper and inbound freight ever increased our per unit costs by approximately 15% for purchases made this year and we're seeing these costs run through our cost of goods sold line as we utilize this inventory.
As previously mentioned variable labor costs for warehouse associates and drivers have increased over 20% Likewise postage and outbound shipping costs have increased in addition to the higher cost availability of resources has increased product receipt lead times, which has led us to procure further in advance of demand lastly.
Recent increases in fuel costs as a result of the Russian invasion of Ukraine will negatively impact our costs, most notably in book fairs, where we manage our own distribution fleet of vehicles.
We are addressing these variable cost increases near and longer term through proactive resource allocation diversifying our vendor base automation product rationalization in the case of fuel consumption route optimization, while our cost savings programs from last year combined with this year's efficiency gains will provide some mitigation to hire.
Variable costs will also be reviewing pricing as appropriate as we look forward to next fiscal year. We are encouraged by our strong customer engagement and demand for our products content and solutions. We expect book fairs to continue their strong pandemic recovery and we are expanding capacity in procuring incremental inventory to meet this demand.
Trade will continue to publish titles and current series and will introduce new characters in content. Both in traditional print format and other media. We are also excited about the future for education solutions business as we expand our digital offerings and content and extend our customer base finally, as previously announced the company approved its regular.
A quarterly dividend of <unk> 15 per share. Thank you for your time today I will now hand, the call back to Paul.
Thank you Ken as a reminder, we invite questions to be directed to our IR mailbox Investor underscore relations at Scholastic Dotcom, we appreciate your time and continuing support.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
Understood.
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