Q2 2023 Scholastic Corp Earnings Call

Good day, and thank you for standing by and welcome to the Scholastic reports Q2 fiscal year 2023 results conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today Jeffrey Matthews. Please go ahead.

Welcome everyone to Scholastics fiscal 2023 second quarter earnings call.

Today on the call I'm joined by Peter work, our President and Chief Executive Officer, and Jim Cleary, Our Chief Financial Officer as usual, we posted the accompanying investor presentation on our IR website, the investor Scholastic Dot com, but you may download now if you've not already done. So we would like to point out that certain statements made today will be forward looking.

These forward looking statements by their nature are subject to various risks and uncertainties and actual results may differ materially from those currently anticipated.

We will be discussing some non-GAAP financial measures to finally regulation G.

A reconciliation of those measures to the most directly comparable GAAP measures can be found in the company's earnings release and accompanying financial tables.

This afternoon on a form 8-K.

This earnings release has also been posted to our Investor Relations website.

We encourage you to review the disclaimers in our release and Investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC.

Did you have any questions. After todays call. Please send them directly to our IR E Mail address investor underscore relations Scott.

Classic Dot com.

And now I'd like to turn the call over to Peter Ward to begin this afternoon's presentation.

Thank you Jasmine and good afternoon, everyone and thanks for joining us.

We delivered strong revenue growth and higher earnings in our second quarter of fiscal 2023.

That's really navigated continued marketing cost headwinds during the important back to school season.

The company sustained momentum reflected three things first the strength of scholastics brand unique channels childrens content and educational products second the improved operating efficiencies we've achieved over the past three years.

And third our continued investments in long term growth opportunities.

Last quarter, we continue taking steps to deploy capital for long term growth and shareholder value.

We completed our acquisition of learning innovations and made progress integrating its product technology and chain.

We also accelerated capital returns to shareholders executing a modified Dutch auction tender offer and expanding our open market share repurchase authorization has announced this afternoon.

We expect this momentum to continue in the second half of fiscal 2023, especially in a seasonally important fourth quarter.

Affirmed our guidance for the year as I will discuss further in a moment. These are very encouraging results, but I'm, especially proud of scholastics nearly 7000 employees, who continue to perform at such a high level without losing focus on scholastics important mission and enormous long term opportunity.

<unk> the growth of children through literacy and the power of stories.

And I'd like to review, our momentum and outlook across our business. Ken will then walk through our financial results and expectations for fiscal 2023. The first a few words on the current business environment.

As has been widely reported consumer confidence in the U S has continued to decline this fall even more so in the U K and Canada two of our largest international markets. This has impacted the retail book selling environment, which has been softer this calendar year compared to a strong year in 2021.

In U S schools and school districts Federal and state funding remains at historically high levels.

But as we discussed last quarter, Sean stuffing of the need to digest last year's product purchases have lengthened selling cycles across the industry and shifted some expected sales into our fiscal fourth quarter on the cost side paper manufacturing and shipping costs remain at high levels in this slide.

I believe scholastics quarter, two games are even more impressive indicative of our company's strengths and competitive advantages and I'm also optimistic about the near and long term market outlook in the short term there are encouraging signs of a rebound in consumer confidence as for example gas prices.

Also the impact of higher input costs is now fully reflected in cost of product in our P&L.

After first flowing through inventories reducing that year over year headwind there.

There are signs of cost improving in some areas, including reduce lead times for inventory purchases and lower transportation costs in the long term, we see families and kids need and demand for literacy and stories to promote happiness knowledge and confidence only growing in the future as the world becomes even more.

Complex and competitive there's also strong consensus that pandemic related declines in the students' reading skills mix.

We're already distressing, allowing the U S demand and sustained long term investments and new outcomes based approaches to teaching literacy, especially in the area of grades and this is exactly why scholastics brand experienced teacher relationships and sales channels are strongest.

And where we're targeting investments to scale, our education solutions business. So turning to our quarter. Two results last quarter's gains were led by strong results in the children's book segment.

Revenues rose, 19%, reflecting robust sales in scholastics unique school base books, Hasnt book club channels and the benefits of our best selling children's publishing operating income increased 33% driven by higher sales and strong operating leverage and improved efficiencies scholastic.

<unk> fast team achieved a record four with revenues up 37%.

The accounts rose to 85% of pre pandemic levels as we'd planned compared to 70% a year ago, and we experienced even stronger revenue per fan than last year and books has operating leverage on higher sales as well as investments over the past three years to optimize warehouse branches and hence processes.

And improve overall marketing and sales efforts all of these contributed to higher segment profitability and our trade channel revenues held near last year's high levels.

Selling publishing and multiple new releases, mostly overcame the impact of a softer retail market.

Also benefited sales in our other channels and in our international and export businesses Scholastics graphics in print continues to dominate in the young adult graphics novel segment, which is effectively created in November scholastic titles held 18 of the top 20 bestsellers on N. P. D. Bookscan is young adult.

Graphic novel list.

This pill kids newly released Cat Kids coming club number four held the number one position and in fact was the best selling title children's and adult categories and its first week of release also performing well in school channels. Scholastic also continues to benefit from a tremendously strong back Mr. Chin.

Runs and young adult books in the series, including recent classics like Harry Potter of course.

Last quarter orders for the New illustrated edition of Harry Potter in the order of the Phoenix, We're strong and we're excited for the upcoming 25th anniversary of the series next September J K. Rowling is Christmas paid also sold very strongly in its second season on its way to becoming an evergreen holiday classic.

We continue to successfully develop our IP for the screen to Stillwater, the animated series on Apple TV, plus which celebrates mindfulness and is based on Jon Lutz titles. Just this past weekend received its second Emmy Award for really good to see the positive response to either the alloy.

Quarter, three and the live action Goosebumps series later on.

Book clubs revenues rose, 11% last quarter relative to the prior year quarter, when the business experienced significant labor and systems issues that delayed revenues into the third quarter of fiscal 2022 book clubs has experienced high revenue per event, but lower than forecast teach your participation. So far this school year.

In part, reflecting the enormous and increasing demands on teachers time, we're focused on the activation and reactivation of teacher sponsors and increased student and family participation at the same time book clubs continue to provide critical connection between scholastic and teachers.

Families and kids, which benefits the entire company.

Clubs fliers in the clubs online presence are key channels that build awareness of new book titles reinvigorate the backlist feed potential purchases to our website and reinforce the scholastic brand.

Now moving to education solutions closer to sales to schools districts and states held steady at last year's record levels. As we continue investing in the division's long term growth opportunity.

As mentioned earlier longer selling cycles for educational products are having an impact on timing there.

This dynamic means that some of the sales than in prior years, we might have expected in the first and second quarters. We now expect to come through in the second half and in the fourth quarter in particular as planned continued strategic investments in long term go to market capabilities for this segment impacted operating income.

We are progressing well with integration of the recently acquired a too high literacy assessment and instruction system and learning <unk> development professional learning and research teams and now integral parts of the education solutions Division increased employee related costs will assist in the continued development of the company.

<unk> comprehensive digital literacy platform.

Next looking at our international segment.

Local currency revenues increased 8%, but declined overall due to the strengthening of the U S dollar.

Local revenues were primarily driven by continued recovery of book fairs, and the success of the company's best selling series titles in trade.

However, revenues were also impacted by more challenging market conditions in Canada, and the U K and in the U S.

Segment operating income decreased $2 million, reflecting higher inflationary costs related to freight paper fuel and labor and major markets and economic conditions in Canada and the U K. This was partially offset by improved margins in Asia and export.

Following the company's exit from the low margin direct to consumer business in Asia, which generated losses in the prior period as I previously discussed we're confident in our ability to continue navigating the current business environment and are affirming our fiscal 2023 guidance for adjusted EBITDA.

$195 million to $205 million based on our momentum in the first half of the year and expectations for a strong fourth quarter. Following a seasonally smaller third quarter. When looking ahead at the second half of fiscal 2023 and are planning to achieve the skull, it's important to consider scholastics business season.

Now, let's see which now more closely resembles what we routinely experienced before the pandemic traditionally the second and fourth fiscal quarters have been our largest most profitable periods with losses recorded in the smaller first and third quarters when school's around summer or winter holidays.

I'd also point out that earnings and adjusted EBITDA of typically being highest in the second half of the year.

We're seeing a return to the seasonality in fiscal 2023.

We expect the final quarter of the year, that's to say March April and may to be driven by the strength in our book fairs, and strong sales and education solutions.

Finally, I'd like to address Scholastics continued progress towards its capital allocation strategy and priorities.

As I've said scholastics significant margin improvements over the past three years and our strong free cash flow outlook create new opportunities to deploy capital for strategic growth at the same time, they enable us to maintain a strong balance sheet and return excess capital to shareholders.

Last quarter, the company returned over $32 $9 million to shareholders through an increased dividend open market repurchases and the modified Dutch auction tender offer.

Today, We also announced that our board has significantly expanded the company's open market repurchase program with an increased authorization of $48 8 million to make $75 million currently available for this purpose.

In order to deploy this authorization will take maximum advantage of opportunities under our open market repurchase program.

As we look ahead.

We'll continue to pursue opportunities to deploy capital in three key areas consistent with our allocation priorities first we will continue to invest in building or acquiring strategic products and capabilities that leverage our current brand channels and capabilities for example investments to build.

Capacity and efficiencies in our book fairs in Jefferson City distribution networks.

We will also continue to explore larger more transformative investments to build or acquire new platforms as we're doing with our literacy platform.

Second we will continue to leverage the strength of our balance sheet to manage risk and support our operations as we've done by funding early inventory purchases or payment discounts to offset supply chain difficulties in higher costs will also continue to review opportunities to optimize our capital structure while protect.

Our balance sheet strength and third we're committed to continuing to return excess capital to shareholders. In addition to our dividend, which we raised this summer and expand and open market repurchases. We will continue to explore additional return mechanisms as we undertake to build market liquidity in our stock.

To facilitate future repurchases and now I'll ask Ken to provide greater detail on the quarter's results.

Thank you Peter and good afternoon today, I will refer to our adjusted results for the second quarter, excluding one time items in the prior year period, unless otherwise indicated no. We recorded no onetime items in this second quarter. Please refer to our press release tables in our SEC filings for a complete discussion of one time items as Peter discussed.

<unk> performance during the critical back to school second quarter of our fiscal year was excellent driven by strong performance in our children's book publishing and distribution segment, which benefited from our improved book Fair operations in a more normalized school environment on the operation side, our plan to order inventory well in advance of the season, given the long lead to.

And our supply chain has been successful as product availability across the company has driven down backlog improved customer satisfaction and helped to reduce operating costs.

Across the company, we are managing operating and head count costs to below pre pandemic levels, while still investing in growth initiatives, we are experiencing.

<unk> substantial cost increases for paper printing and transportation that are impacting our gross margins. We're seeing these inflationary pressures starting to abate.

In short we continued our strong start to our fiscal year and the important second quarter.

And are optimistic about the future. We are therefore, affirming our adjusted EBITDA guidance of 195 million to $205 million for fiscal 2023.

Turning to our consolidated financial results revenues grew 12% to $587 $9 million.

Operating income in the quarter was up 19% to $100 $1 million.

Net income was $75 $3 million compared to $64 $4 million last year.

And adjusted EBITDA rose, 14% to $122 $3 million compared to the second quarter last year.

<unk> per diluted share was $2 12 comp.

Compared to earnings per diluted share of $1.80 last year.

For the six months period revenue was $858 million.

Compared to $784 million last year, and operating income was $42 million compared to $48 $1 million last year.

Six month, adjusted EBITDA is $86 $7 million.

Compared to $94 $5 million last year.

Net cash provided by operating activities for the six month period was $21.3 million compared to $141 $6 million last year.

Free cash use for the six month period was $13 $8 million.

Compared to free cash flow of $124 $5 million last year.

As a result of our successful strategy to acquire inventory earlier this year in anticipation of increased sales and longer lead times as well as due to higher cost of product inventory purchases year to date have increased $142 million relative to last year's depressed levels contributing to the increase in cash utilized for this fits.

School year.

We estimate that approximately a third of this year over year increase reflects the timing of inventory purchases within the fiscal year, we're starting to see lead times for inventory purchases start to decrease and are modifying our buying patterns to better match the shorter lead times.

Additionally, last year's cash flow benefited from a $63 $1 million federal tax refund.

At the end of the quarter cash and cash equivalents exceeded total debt by $256 $3 million compared to $286 $4 million at the end of the second fiscal quarter, a year ago. Our strong balance sheet has allowed us proactively manage working capital through the supply chain crisis by strengthening vendor relationships and negotiating falling.

Rebates and early pay discounts, while also allowing us to invest in content with key best selling authors.

Capital expenditures in capitalized prepublication costs for the six month period were $35 $1 million compared to $27 $5 million last year.

We expect Capex and pre pub spend to exceed last year as we invest in our education solutions business and distribution operations.

Current fiscal year, we returned capital through our tender offer for our shares in open market repurchases through today, we have reacquired 724000 shares returning $31 $1 million to our shareholders in the current fiscal year, while our tender offer was undersubscribed, we will continue to pursue open market share.

To this end our board of Directors has approved an increase in our current share buyback authorization from $26 $2 million to $75 million.

Finally, our board of Directors has approved a <unk> 20 per share regular quarterly dividend to be paid in March.

The company is committed to continuously monitoring and improving our capital allocation, focusing our long term growth operational efficiency and returning excess capital to shareholders.

Turning to our segment results in children's book publishing and distribution revenues for the second quarter of $418 $3 million exceeded the prior year's revenues of $352 5 million operating income increased to $113 $2 million compared to $85 $2 million in the prior year.

Period.

Our book Fairs operations led these impressive results.

Book fairs revenues increased to $248 million from $176 $2 million in the prior fiscal quarter.

Fair Count is on track to rise about 85% of pre pandemic levels from 70% last year.

Coming out of the pandemic our operations are greatly improved and demand at event based activities such as our in person book fairs as strong a book fairs team has worked to simplify and amplify our fare offerings through improved product assortment.

<unk> fared experiences and by facilitating better family and student engagement, including through strategies to expand equity abaxis.

Accordingly revenue per fair in our key efficiency metric grew substantially over last year.

Higher revenue per fair results in improved margins and profitability as it does not entail significant increases in operating costs.

Book clubs revenues of $57 $6 million were higher than the reported revenues of $51 $9 million in the prior period as previously mentioned the prior period was hampered by system implementation issues, which drove higher distribution costs in our backlog of customer orders last year of approximately $20 million.

As of November 30th 'twenty 'twenty. One these orders were delivered in the third quarter of last fiscal year.

These systems and operational problems have been fixed and as a result, our distribution costs have improved dramatically and we did not have order backlog at the end of this Q2 trade division posted strong results against a good prior year quarter with revenues of $119 $9 million compared to.

$124 $4 million last year and.

In the prior fiscal quarter, we released J K Rowling is the Christmas pig, which drove the higher revenues in the prior period as previously.

We mentioned product availability was strong this year for product costs were substantially higher than the prior year rising about 15%.

Our trade publishing group is the key content provider for the entire company and our industry, leading editorial staff continues to develop and maintain relationships with key authors illustrators and agents and the children's publishing world.

Content produced by the trade group also fuels, our growing media footprint with key production such as either the outlet, which was announced earlier this year education solutions revenues of $80 million were on par with the prior year revenues of $79 5 million quarterly.

Quarterly operating income was $7 million compared to prior year operating income of $15 $6 million.

We're currently investing in this division and we have identified substantial growth opportunities.

As Peter mentioned these are same times and education solutions as we continue to build out our solutions model and product offering the learning, it's ovations acquisition and their proprietary assessment tool H Y are a key focus of this effort as a result of this increased investment we are building out staff increasing development work inquiry.

<unk> sales capabilities and spending Opex and Capex on the integration of AQR Accordingly, we.

We expect higher costs in this segment for the current year the integration of HOS now expected to impact earnings by approximately $3 million in the current year, which was not contemplated in our original plan.

Overall general lessor funding is expected to positively impact this segment through calendar year 2024.

The ultimate annual results for education solutions are largely dependent upon the fiscal fourth quarter when schools and districts seasonally spend funding on curriculum and other products for the upcoming year and when summer reading programs kick in.

We have outperformed our expectations in each of the last two fiscal fourth quarters the.

The volume and timing of sales in this period can have material impacts on the company's fiscal year results.

International segment revenues of $89 $6 million trailed the prior period revenues of $92 $2 million with foreign exchange rates driving $10 $1 million of the decline due to the strong U S dollar.

Operating income of $6 $7 million was unfavorable to the prior period operating income of $9 million.

Australia, New Zealand, so widespread lockdowns and the prior year's second quarter for recovered and are now exceeding our expectations for the current fiscal period.

While Canada and U K operations continued to recover from the pandemic. Each of these nations is now being impact by worsening economic conditions that are driving costs higher.

Lowering the disposable income in their customers.

Much like the U S book fairs operations and the demand for event based activities in Canada, Australia, New Zealand and the U K are a bright spot.

Our business in China continued to struggle under Covid restrictions in government regulations around tutoring and foreign content for recent actions regarding COVID-19 restrictions are encouraging.

Allocate overhead costs of $26 $8 million in this year's second fiscal quarter were relatively flat to prior year's second quarter as we continue to tightly control discretionary spending and our experienced improved efficiencies and <unk>.

Centralized distribution facility.

If you report that we have recently signed a long term lease agreement for the remaining Broadway facing retail space in our headquarters property at market rates suddenly some return to normalcy in the New York City real estate market.

We expect occupancy to commence later this fiscal year.

As a result of our performance year to date and our current forecast we are affirming our adjusted EBITDA estimate of 195 million to $205 million.

Cost of product is trending modestly higher than our initial expectations as a result of higher freight costs. We're starting to see these cost decline we continue to show strong discipline on discretionary spending.

And our school based channels book fairs results, notably revenue per fair have exceeded our expectations were partially offset by declines in teachers' participate in our book clubs programs. We are encouraged by our strong customer engagement and demand for our products content and solutions.

We're focused on delivering current results while building on growth opportunities for the future.

External economic risks remain what our businesses have proven to be resilient through economic downturns in the past and we expect any impact to be modest.

Thank you for your time today, I will now hand, the call back to Peter.

Thank you Ken.

As both of US have discussed this afternoon scholastic performed strongly in the second quarter as we leaned into our unique strengths and competitive advantages to serve kids families and schools, while successfully navigating a more complex business environment based on our current momentum and a positive outlook, including for <unk>.

Fourth quarter in the near term and growing long term demand for electricity in stories, we're optimistic about our future growth and achieving our fiscal 2023 goals.

In closing I want to again, thank every educator family and partner, that's helping raise up the students in that community as well as our employees who are working tirelessly to support your eye.

I also want to thank our shareholders for their continued support.

I wish everyone a happy holiday season. Thank you all again for joining our call today, Jeff will conclude this afternoon's presentation for us. Thank you Peter.

As a reminder, we invite questions to be directed to our IR email investor underscore relations as classic Dotcom. We appreciate your time and continued support.

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

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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