Q3 2024 Scholastic Corp Earnings Call
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Operator: Good day. Thank you for standing by. Welcome to the Scholastic Reports Q3 Fiscal Year 2024 Results Conference Call. At this time, all participants are in a listen-only mode.
Good day, Thank you for standing by welcome to the Scholastic reports Q3 fiscal year 2024 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session. Please press star one on your telephone.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Jeffrey Mathews.
And wait for your name to be announced to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jeff.
Jeff: Jeffrey Matthews.
Jeffrey Mathews: Welcome everyone to Scholastic's fiscal 2024 third quarter earnings call. Today on the call, I'm joined by Peter Warwick, our president and chief executive officer, and Haji Glover, our new chief financial officer and executive vice president, who I'm excited to welcome. As usual, we posted the company investor presentation on our IR website at investor.scholastic.com, which you may download now if you've not already done so. We'd 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. In addition, we'll be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliation of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and in company financial tables, filed this afternoon on Form 8K. This earnings release has also been posted to our investor relations website. I 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, followed by the SEC.
Jeffrey Mathews: Welcome everyone to Scotts <unk> fiscal 2024 third quarter earnings call today on the call I'm joined by Peter work, our President and Chief Executive Officer, and How'd, you whoever our new Chief Financial Officer, and Executive Vice President, who I'm excited to welcome Bill.
As usual, we posted the accompanying investor presentation on our IR website at Investor Scholastic Dot Com, which you may download now if you've not already done so we.
We'd like to point out that certain statements made today will be forward looking.
Jeffrey Mathews: Forward looking statements by their nature are subject to various risks and uncertainties and actual results may differ materially from those currently anticipated.
Jeffrey Mathews: In addition, we'll be discussing some non-GAAP financial measures as defined in regulation G. The.
Jeffrey Mathews: The reconciliation of those measures the most directly comparable GAAP measures can be found in the company's earnings release and accompanying financial tables filed this afternoon on a form 8-K.
Jeffrey Mathews: This earnings release has also been posted to our Investor Relations website I 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.
Jeffrey Mathews: 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.
Jeffrey Mathews: Now I'd like to turn the call over to Peter work begin this afternoon's presentation.
Peter Warwick: So thanks, Jeff and good afternoon, everyone. We appreciate you joining us today.
Peter: During the third quarter scholastic executed our long term strategy for growth and impact while delivering value for our shareholders.
Peter: In particular, we continue to prove our leadership in children's publishing and media through a consistent and growing presence on best seller lists and advanced our 360 degree content creation strategy, including with our recently announced agreement to acquire 100% of the economic interest in nine story media group.
Peter: Which I'll discuss in Ireland.
Peter: In quarter three we also continue to execute solidly and school reading events and education solutions, while navigating the currently complex environment in U S schools and positioned ourselves for an important quarter for season and long term growth.
Peter Warwick: Should you have any questions after today's call, please send them directly to our IR email address, investor-relations at scholastic.com. Now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation. So, thanks Jeff, and good afternoon everyone.
We demonstrated our confidence in the long term outlook for our business with continued share buybacks returning over $60 million to shareholders during the quarter through a combination of open market share repurchases directly dividend.
Peter: As expected in quarter, three scholastic recorded modest revenue declines in higher losses, largely reflecting external factors and a shifting seasonality of our business going into quarter four typically our biggest and most profitable quarter. We're confident in achieving our previously provided revised fiscal <unk>.
Peter Warwick: We appreciate you joining us today. During the third quarter, Scholastic executed our long-term strategy for growth and impact while delivering value for our shareholders. In particular, we continue to prove our leadership in children's publishing and media through a consistent and growing presence on bestseller lists and advanced our 360-degree content creation strategy, including with our recently announced agreement to acquire 100% of the economic interest in Nine Story Media Group, which I'll discuss in a moment. In Quarter 3, we also continued to execute solidly in school reading events and education solutions while navigating the currently complex environment in U.S. schools and positioned ourselves for We demonstrated our confidence in the long-term outlook for our business with continued share buybacks, returning over $60 million to shareholders during the quarter through a combination of open market share repurchases and our regular dividends. As expected, in quarter three, Scholastic recorded modest revenue declines and higher losses, largely reflecting external factors and the shifting seasonality of our business.
Peter: 24 guidance for adjusted EBITDA of between $165 million $275 million with full year revenue of approximately level with or slightly below the prior year.
Peter: I'm thrilled to be joined on today's call by our new CFO Archie clever who rejoined scholastic in January had she is a forward looking growth oriented finance leader, who already know scholastic Wow is well positioned to drive change and focus our business on the future using his experience and perspective.
Peter: To build on the work of his predecessor, Ken Cleary, who led the finance organization to dramatically increase efficiencies across our operations.
Peter: <unk> is another key addition to the scholastic leadership team, bringing new perspectives, new skills and a shared commitment to helping scholastic build and execute our plans for long term growth and value creation.
Peter: As announced this morning, we've appointed two new directors to our board tier Henderson and Alex career, they're both accomplished leaders in K 12, education and education technology with extensive experience serving kids families and schools as well as expertise driving excellence in complex organ.
Peter: <unk>.
Peter: <unk> career spans over three decades of work in schools policy and the not for profit sector, earning her reputation as one of the most admired school leaders in America, Alex contributes over 20 years of experience in the education sector, including as a teacher and successful at tech entrepreneur that joining the.
Peter Warwick: Going into quarter four, typically our biggest and most profitable quarter, we're confident in achieving our previously provided revised fiscal 2024 guidance for adjusted EBITDA of between $165 million and $175 million, with full year revenue approximately level with or slightly below the prior year. I'm thrilled to be joined on today's call by our new CFO, Haji Glover, who rejoined Scholastic in January. Haji is a forward-looking, growth-oriented finance leader who already knows Scholastic well. He's well-positioned to drive change and focus our business on the future, using his experience and perspective to build on the work of his predecessor, Ken Cleary, who led the finance organization to dramatically increase efficiencies across our operations. Haji is another key addition to the Scholastic leadership team, bringing new perspectives, new skills, and a shared commitment to helping Scholastic build and execute our plans for long-term growth and value creation. As announced this morning, we've appointed two new directors to our board, Kaya Henderson and Alex Guerrero.
Peter: Company is an exciting moment when their skills experience and market knowledge are especially relevant to us and we're very happy to welcome them.
Peter: Turning now to the highlights across our business segments.
Peter: And the children's book publishing and distribution segment revenues declined 5% as last quarter reflected the planned resizing, our book clubs as well as lower expected production revenue from Scholastic Entertainment.
Scholastics trade publishing continued to outperform with consolidated trade sales up 15%, excluding scholastic entertainment.
Peter: This strong performance contrasts positively with the juvenile and young adult retail book selling market, which was down a slight 1% during the quarter as overall sales levels continue to revert to pre pandemic growth trends.
Peter: Elastic exceptional shying in retail was driven by a strong performance out of the holiday season, and multiple new releases, including heroes by Alan Grafts and the latest titles in a pocket of graphic novels series Heart Stopper wings of fire ambulance and the baby Sitters club.
Peter: Scholastics, New Frontlist titles top bestseller lists and we continue to expand our market share of metal grade graphic novels, one point last quarter impact scholastic titles filled every spot on book scandals Top 20 list of best selling juvenile graphic novels.
In 2024, we've increased our already dominant presence on the New York Times Middle grade and graphic books and manga bestseller lists compared to the same period last year.
Peter Warwick: They are both accomplished leaders in K-12 education and education technology, with extensive experience serving kids, families, and schools, as well as expertise driving excellence in complex organizations. Kaya's career spans over three decades of work in schools, policy, and the not-for-profit sector, earning her a reputation as one of the most admired school leaders in America. Alex brings over 20 years of experience in the education sector, including as a teacher and successful edtech entrepreneur. They're joining the company at an exciting moment when their skills, experience, and market knowledge are especially relevant to us, and we're very happy to welcome them. Turning now to the highlights across our business segments. In the children's book publishing and distribution segment, revenues declined 5% as last quarter reflected the planned resizing of book clubs as well as lower expected production revenue from Scholastic Entertainment.
Peter: This includes wave right at the long awaited finale in the amulet series, which landed at number one on the New York Times graphic novel bestseller list and was the number one juvenile titles. The week is on sale with over 30000 copies shallow.
Peter: We're also excited about multiple upcoming releases, which we expect to drive further momentum in our children's publishing will spotlight hiring credible offers.
Peter: Includes two more releases this calendar year, and Dave Pillowcase Dog Man series, including Dog Man, the Scarlet shatter, which went on sale earlier this week in.
Peter: In August we released Unocal, a new Kid friendly manga series, which is already generating a lot of bars.
Peter: Highlights of our full calendar include the illustrated edition of Suzanne Collins' worldwide bestseller, the hunger games and New illustrated Christmas at Hogwarts, and the latest novel from Best selling and award winning author Alex Hoffmann, when we flew away and novel of Anne Frank before the diary.
Peter: And scholastic entertainment revenues were down in quarter three relative to the prior year period. When we recorded revenue for delivery of episodes of either the outlet. However building for the future. We continue to execute on our 360 degree strategy, bringing scholastic brands and franchises to the screen.
Peter Warwick: Scholastic's trade publishing continued to outperform, with consolidated trade sales up 15%, excluding Scholastic Entertainment. This strong performance contrasts positively with the juvenile and young adult retail book selling market, which was down a slight 1% during the quarter, as overall sales levels continue to revert to pre-pandemic growth trends. Scholastic's exceptional showing in retail was driven by a strong performance in the holiday season and multiple new releases, including Heroes by Alan Gratz and the latest titles in our popular graphic novel series Heartstopper, Wings of Fire, Amulet, and The Babysitter's Club. Our new front-list titles topped bestseller lists, and we continued to expand our market share of middle-grade graphic novels. At one point last quarter, in fact, Scholastic titles filled every spot on BookScan's top 20 list of best-selling juvenile graphic novels.
Peter: Disney announced another season of the live action Goose bumps TV series on Disney plus after a highly successful first season this past fall.
Peter: We expect the second season to drive significant incremental exposure in upside product global best selling book series and brand.
Peter: As the President of Disney branded television has said quote audiences everywhere I fell in love with Goosebumps, Chills, Thrills heart and humour, making it one of Disney branded televisions most watched shows of last year.
Peter: In addition to the Goosebumps franchise, we continue to partner with top tier platforms producers screenwriters and actors to meet strong demand for new starts here.
Peter: As I've discussed on previous calls we have multiple exciting projects in our pipeline building on best selling scholastic franchises like Magic School glass thirty-nine clues any morphs fly guy and more as we continue to create new media moments to complete the virtuous circle of children's brands on <unk>.
Peter: Page and screen.
Peter: Turning to our school reading events Division the fiscal first and third quarters are typically a quieter time, given the timing of school holidays.
Peter Warwick: In 2024, we've increased our already dominant presence on the New York Times middle grade and graphic books and manga bestseller lists compared to the same period last year. This includes Wave Rider, the long-awaited finale in the Amulet series, which landed at number one on the New York Times graphic novel bestseller list and was the number one juvenile title the week it went on sale, with over 30,000 copies sold. We're also excited about multiple upcoming releases, which we expect to drive further momentum in our children's publishing and spotlight our incredible authors. This includes two more releases this calendar year in Dave Pilkey's Dogman series, including Dogman: The Scarlet Shedder, which went on sale earlier this week.
Peter: In book Fairs sales declined slightly in quarter, three revenue per pad or RPF remains close to record levels. However, This school year, we have seen RPF declined slightly this largely reflects the addition of smaller fast to the full schedule as we increased <unk> count as well as <unk>.
In the school environment, including high rates of absenteeism, which impacts student participation and teacher shortages.
Peter: That said Fad count remains strong and on track to meet our goal of returning to 90% of pre pandemic levels, while strengthening the profitability of our fast.
Peter: Thanks to our customer centric approach from improved tools for book for a host of new payment options for kids and families to Kid favorite merchandising and assortment. We continue to deliver the unique joyful celebration of reading, but only scholastic book fairs can provide as a result, we remain optimistic.
About a strong spring season.
Peter Warwick: In August, we release Unico, a new kid-friendly manga series which is already generating a lot of buzz. Highlights of our fall calendar include the illustrated edition of Suzanne Collins' worldwide bestseller, The Hunger Games, a new illustrated Christmas at Hogwarts, and the latest novel from bestselling and award-winning author Alice Hoffman, When We Flew Away, a novel about Anne Frank before the diary. In Scholastic Entertainment, revenues were down in quarter three relative to the prior year period when we recorded revenue for delivery of episodes of Eva the Owlet. However, building for the future, we continue to execute on our 360-degree strategy, bringing Scholastic brands and franchises to the screen. Disney has announced another season of the live-action Goosebumps TV series on Disney+.
Peter: Last quarter. We also further refined our plan to strategically re sized book clubs to a more profitable core as part of our plan to achieve long term profit growth in school reading events over time.
Peter: We're already seeing cost savings as a result.
Third lower teach a participation will spending from earlier this school year is carrying over into clubs spring results as expected.
Peter: Moving to education solutions quarter, three sales were down very modestly as we operationalize our growth strategy and realign key product lines in the market to deliver blended literacy focus solutions we.
Peter: See significant opportunities ahead and are advancing plans to reinvent our classroom magazines business to combine digital content and instruction.
Peter: As we work to broaden and deepen our print and digital offerings. We're focused on meeting the needs of educators, the increasing need for literacy products and schools and districts ability to tap multiple funding streams, including federal ASUR funding, which school districts must commit to us by September two.
Peter Warwick: After a highly successful first season this past fall, we expect the second season to drive significant incremental exposure and upside for our global best-selling book series and brands. As the president of Disney-branded television has said, quote, audiences everywhere fell in love with Goosebumps' chills, thrills, heart, and humor, making it one of Disney-branded television's most-watched shows of last year. In addition to the Goosebumps franchise, we continue to partner with top-tier platforms, producers, screenwriters, and actors to meet strong demand for nostalgia. As I've discussed on previous calls, we have multiple exciting projects in our pipeline building on best-selling Scholastic franchises like Magic School Bluffs, 39 Clues, Animorphs, Fly Guy, and more, as we continue to create new media moments to complete the virtuous circle Turning to our School Reading Events Division, the fiscal first and third quarters are typically a quieter time, given the timing of school holidays. For book fairs, sales declined slightly in quarter three.
Peter: 1024.
Peter: Turning to our international segment revenues and profits were up strongly as a result of the ongoing recovery in book sales, particularly in Canada, The U K and Asia.
Peter: Our international team is focused on helping to drive the recovery in target markets and ensuring our titles are optimally positioned while further driving efficiencies and leveraging corporate resources as appropriate.
Peter: Since its 2017 reboots Scholastic entertainment has proven that there is significant demand for scholastics, Brandon publishing IP on the screens as well as the page and then we can effectively and profitably meet this demand.
Peter: Further as it happens more channels and opportunities to reach kids, where they are we've seen this strategy boost book sales and increase the value of our IP and brand. This is the virtuous circle that ive spoken of battles.
Peter: Last week's announcement to invest in nine story media group was a timely opportunity to cement our relationship with a long time mission aligned partner and team nine story is an industry, leading creator producer and distributor of premium animated and live action children's content.
Peter: Scholastic has been working with the company and its founder for over 20 years.
Peter: By acquiring 100% of the economic interest in a minority of voting rights and nine story media group, we achieved two things fast will significantly expand the scope and scale of our media business, adding nine stories production distribution and licensing revenue and profit lines to scholastic.
Peter: Second through greater strategic coordination and integration will substantially increase our ability in speed in building and monetizing scholastics global multimedia children's brands, which underpin and will broaden our 360 degree content creation strategy.
Peter Warwick: Revenue per fair, or RPF, remains close to record levels. However, this school year, we have seen RPF decline slightly. This largely reflects the addition of smaller fairs to the full schedule as we increase fair count, as well as headwinds in the school environment, including high rates of absenteeism, which impacts student participation, and teacher shortage. That said, fair count remains strong and on track to meet our goal of returning to 90% of pre-pandemic levels while strengthening the profitability of our fair. Thanks to our customer-centric approach, from improved tools for book fair hosts and new payment options for kids and families, to kit favorite merchandising and assortments, we continue to deliver the unique, joyful celebration of reading that only Scholastic book fairs can provide. As a result, we remain optimistic about a strong spring season.
Peter: These two rationale as a complementary and additive which is why we're so excited about this transformative opportunity for scholastic.
Peter: With nine story in addition to the talent of their team and our exciting pipeline, we're acquiring turnkey global production studios in Toronto, Dublin in Bali with state of the autonomous and live action production capabilities.
Peter: Quality of their work speed strict south with 'twenty, One Emmy Award wins.
Peter: <unk> story controls and extensive content library distributing over 5000 half hour episodes of two D and three D animation together with a live action catalog as well as over 10000 half hour programs distributed across major advertising video on demand or Eva platforms.
Peter: Nine story also has the ability to tap into significant Canadian and Irish tax subsidies and to pre sell and monetize productions through that global sales distribution and licensing teams.
Peter: This substantially de risks new projects and improves the long term economics of media franchises far beyond what's possible under our current arm's length relationship.
Peter: As I previously mentioned, we believe this investment to acquire 100% of the economic interest in nine story will significantly deepen our capabilities across the entire IP lifecycle in turn bolstering our 360 degree content creation strategy.
Peter Warwick: Last quarter, we also further refined our plan to strategically resize book clubs to a more profitable core, as part of our plan to achieve long-term profit growth in school reading events over time. We are already seeing cost savings as a result. That said, lower teacher participation and spending from earlier this school year are carrying over into club spring results, as expected. Moving to education solutions, quarter three sales were down very modestly as we operationalized our growth strategy and realigned key product lines in the market to deliver blended literacy-focused solutions. We see significant opportunities ahead and are advancing plans to reinvent our classroom magazines business to combine digital content and instruction. As we work to broaden and deepen our print and digital offerings, we're focused on meeting the needs of educators, the increasing need for literacy products, and schools and districts' ability to tap multiple funding streams, including federal ESSA funding, which school districts must commit to use by September 2024. Turning to our international segment, revenues and profits were up strongly as a result of the ongoing recovery in book sales, particularly in Canada, the UK, and Asia. Our international team is focused on helping to drive the recovery in target markets and ensuring our titles are optimally positioned while further driving efficiencies and leveraging corporate resources as appropriate.
Scholastic a nine story share the same mission to engage children and families with inspiring stories and content in today's world. It's important that we meet kids, where they are and bring them back to reading.
Peter: We see tremendous opportunity to leverage the deeper capabilities, we gained from the deal to support the growth of Scholastics Childrens franchises drive book sales create additional opportunity for scholastic walkers and partners and introduce millions of new kids and families to scholastic books and stories.
Peter: We'll also expand long term monetization opportunities as we bring nine stories in house distribution merchandising and licensing teams and global sales network almost of the scholastic platform.
Peter: So to sum up we believe this deal is both additive and synergistic it adds nine stories industry, leading capabilities and revenue streams that compelling economic model and a highly talented team.
Peter: Leveraging scholastics trusted brand and proven ability to create iconic children's series and franchises the new capabilities will allow us to build deeper connections with young people through our stories as the pages of our books come to life on screens and through merchandising.
Peter: In short this opportunity positioned scholastic to meet the continued strong demand for high quality kids and family Entertainment expanding the footprint of Scholastics authors and illustrators building global franchises on every platform and of course, creating more value for our shareholders.
We look forward to sharing more once the deal is closed and with that I'll now hand, the call over to <unk>.
Speaker Change: Thank you Peter and good afternoon, everyone.
Before I turn to our financial results I would like to say, how happy I am to be back at Scholastic a company, whose mission and people are very dear to me.
Speaker Change: As the new CFO I have the privilege and the opportunity to lead a strong mission driven financial organization at scholastic at a very exciting moment in our company's history.
Peter Warwick: Since its 2017 reboot, Scholastic Entertainment has proven that there's significant demand for Scholastic's brand and publishing IP on screens, as well as on the page, and that we can effectively and profitably meet this demand. Further, as it opens more channels and opportunities to reach kids where they are, we've seen this strategy boost book sales and increase the value of our IP and brand. This is the virtuous circle that I've spoken about.
Speaker Change: The work that Ken and the finance team achieved two drive efficiencies over the past few years has created a solid foundation that we can now use strategically to accelerate opportunities for growth and value creation. Our outlook is also strengthened by the progress we have made over the past year and a half.
Speaker Change: Are we keeping capital against our priorities, which include investing in growth opportunities, maintaining a strong and efficient balance sheet and returning excess cash to the shareholders to enhance their returns our recent agreement to invest in nine story and the over $60 million and we returned to shareholders last quarter, both speak to die.
Peter Warwick: Last week's announcement to invest in Nine Story Media Group was a timely opportunity to cement our relationship with a long-time, mission-aligned partner and team. Nine Story is an industry-leading creator, producer and distributor of premium animated and live-action children's content. Scholastic has been working with the company and its founder for over 20 years. By acquiring 100% of the economic interest and a minority of voting rights in nine-story media group, we achieved two things, will significantly expand the scope and scale of our media business, adding nine stories, production, distribution and licensing revenue and profit lines to Scholastic Corp. Second, through greater strategic coordination and integration, we'll substantially increase our ability and speed in building and monetizing Scholastic's global multimedia children's brands, which underpin and will broaden our 360-degree content creation strategy.
Speaker Change: Progress.
Speaker Change: I look forward to supporting Peter My talented colleagues and the board and continuing through rigorously allocate capital to support scholastic long term growth.
Speaker Change: With that I will now walk through our consolidated financial results.
Speaker Change: We will refer to our adjusted results for the third quarter, excluding onetime items unless otherwise indicated.
Speaker Change: In fiscal 2023, the company did not report onetime items.
Speaker Change: Please refer to our press release tables.
Speaker Change: SEC filings for a complete disclosure of one time items.
Speaker Change: As Peter described in our seasonally smaller third quarter revenues were $323 7 million just slightly below the prior year period adjusted operating loss in the quarter grew to $30 6 million as expected, reflecting increasing seasonality and spending in preparation for him.
Speaker Change: Anticipating significant Q4 compared to $27 7 million a year ago.
Speaker Change: Adjusted EBITDA was a loss of $7 2 million from $5 4 million a year ago in line with adjusted operating income adjusted net loss, excluding onetime items was $23 3 million compared to $19 2 million in the prior year period.
Peter Warwick: These two rationales are complementary and additive, which is why we're so excited about this transformative opportunity for Scholastic. With 9Story, in addition to the talent of their team and their exciting pipeline, we're acquiring turnkey global production studios in Toronto, Dublin, and Bali with state-of-the-art animation and live-action production capabilities. The quality of their work speaks for itself, with 21 Emmy Award wins.
Speaker Change: Adjusted loss per diluted share was <unk> <unk> compared to 57 seven in fiscal 2023, turning to our segment results in children's book publishing and distribution revenues for the third quarter decreased 5% to $193 6 million primarily driven by.
Speaker Change: Strategic re sizing of book clubs.
Speaker Change: Adjusted segment operating income was $2 7 million up from $1 9 million in the prior year period, reflecting improved efficiencies on modestly lower revenues.
Peter Warwick: Nine Story controls an extensive content library distributing over 5,000 half-hour episodes of 2D and 3D animation together with a live action catalog, as well as over 10,000 half-hour programs distributed across major advertising video on demand platforms. Ninestory also has the ability to tap into significant Canadian and Irish tax subsidies and to pre-sell and monetize productions through their global sales, distribution, and licensing teams. This substantially de-risks new projects and improves the long-term economics of media franchises far beyond what's possible under our current arm's-length relationship. As I previously mentioned, we believe this investment to acquire 100% of the economic interest in 9Story will significantly deepen our capabilities across the entire IP lifecycle, in turn bolstering our 360-degree content creation strategy. Scholastic and 9Story share the same mission to engage children and families with inspiring stories and content. In today's world, it's important that we meet kids where they are and bring them back to reading.
Speaker Change: Within the segment consolidated trade revenues were $77 6 million in the quarter compared to the prior period revenues of $72 8 million driven by strong frontlist cells in multiple bestsellers in the quarter.
Speaker Change: This was partially offset by lower timing related revenues and scholastic entertainment relative to the prior year when the company completed the delivery of episodes of the animated series <unk> the outlet based on Scholastics, our diary series.
Speaker Change: Book Fair revenues decreased 1% to a herd and $2 $7 million in the quarter driven by slightly lower average revenue per fair, partly offset by higher fair Count Fair count remains on track to reach nearly 90% of prepayment to make levels. This year.
Speaker Change: Up from 85% in fiscal 2023.
Speaker Change: Book Club revenues of $13 3 million were down versus prior year period revenues of $27 7 million.
Speaker Change: As the company has previously discussed we eliminated unprofitable offerings during the back to school season as part of our strategy to shrink this business to a more profitable core.
Speaker Change: These actions impacted third quarter revenues as expected and we will continue to have an impact for the remainder of the school year.
Speaker Change: Turning to the education solutions segment revenues were down 2% to $68 5 million in the third quarter, reflecting lower sales of supplemental and structural materials, partially offset by higher state sponsor program revenues segment operating loss was 800000 compared to profit of 700000.
Speaker Change: And the prior period.
Speaker Change: Largely reflecting lower revenues and continued investments to realign key product lines to deliver blended literacy focused solutions.
Peter Warwick: We see tremendous opportunity to leverage the deeper capabilities we gain from the deal to support the growth of Scholastic's children's franchises, drive book sales, create additional opportunities for Scholastic authors and partners, and introduce millions of new kids and families to Scholastic books and stories. We'll also expand long-term monetization opportunities as we bring Nine Stories' in-house distribution, merchandising, and licensing teams and global sales network onto the Scho So to sum up, we believe this deal is both additive and synergistic. It adds nine stories, industry-leading capabilities and revenue streams, that compelling economic model, and a highly talented team. Leveraging Scholastic's trusted brand and proven ability to create iconic children's series and franchises, the new capabilities will allow us to build deeper connections with young people through our stories as the pages of our books come to life on screens and through merchandise.
Speaker Change: International segment revenues increased 16% to $59 1 million in the quarter, reflecting continued recovery in our major markets, particularly in Canada, and the U K as well as in Asia.
Speaker Change: The net foreign exchange impact was negligible in the quarter.
Speaker Change: Segment operating loss improved to $5 9 million compared to a loss of $9 million a year ago, primarily driven by improved results in Canada, which benefited from the reorganization of book clubs in the first quarter.
Speaker Change: Our adjusted unallocated overhead costs of $26 6 million increase from $21 3 million in the prior period, primarily reflecting favorable litigation settlements in the prior year. This was partially offset by higher rental revenue recorded in corporate overhead in the current period.
Speaker Change: As a reminder, this was previously recorded as a benefit in SG&A in the prior year period.
Speaker Change: On approximately 27000 square feet leased as of today, we expect annualized straight line rental revenue to total approximately $9 9 million in the fiscal 2024.
Speaker Change: Now turning to cash flow and the balance sheet.
Speaker Change: Net cash provided by operating activities was $13 1 million in the current quarter compared to $7 6 million in the prior period.
Speaker Change: Inventory spend in the quarter, driven by lower freight and manufacturing costs compared to a year ago improved working capital. We continue to manage inventory purchases substantially closer to our demand, resulting in sufficient inventory on hand and lower spend.
Haji Glover: In short, this opportunity positions Scholastic to meet the continued strong demand for high-quality children's and family entertainment, expanding the footprint of its authors and illustrators, building global franchises on every platform, and, of course, creating more value for our shareholders. We look forward to sharing more once the deal is closed, and with that, I'll now hand the call over to Haji. Thank you, Peter, and good afternoon, everyone.
Speaker Change: Free cash flow use in the third quarter was $7 1 million compared to $11 9 million in the prior year period, reflecting lower working capital, partially offset by onetime severance costs.
Speaker Change: At the end of the quarter cash and cash equivalents net of total debt was $78 9 million compared to $218 5 million at the end of the fiscal 2023.
Speaker Change: In addition to investments in content and capabilities to drive growth. We continued to return capital to shareholders in the third quarter through our regular dividend and open market share repurchases.
Haji Glover: Before I turn to our financial results, I would like to say how happy I am to be back at Scholastic, a company whose mission and people are very dear to me. As the new CFO, I have the privilege and the opportunity to lead a strong, mission-driven financial organization at Scholastic at a very exciting moment in the company's history. The work that Ken and the finance team achieved to drive efficiencies over the past few years has created a solid foundation that we can now use strategically to accelerate opportunities for growth and value creation. Our outlook is also strengthened by the progress we have made over the past year and a half allocating capital against our priorities, which include investing in growth opportunities, maintaining a strong and efficient balance sheet, and returning excess cash to the shareholders to enhance their returns. Our recent agreement to invest in Nine Story and the over $60 million we returned to shareholders last quarter both speak to that progress. I look forward to supporting Peter, my talented colleagues, and the Board in continuing to rigorously allocate capital to support Scholastic's long-term growth.
Speaker Change: We repurchased one 4 million shares in the third quarter for $54 2 million.
Speaker Change: Other with our regular dividend, we returned over $60 million in the third quarter and $161 million. So far this fiscal year and fiscal 2024, thus far we have repurchased three 6 million shares, which net of 523000 shares issued related to stock compensation.
Speaker Change: Represents 11% of the company's shares outstanding the company's shares outstanding are now below $28 million, we do not anticipate our share repurchase program or regular dividend to be impacted by the investment in nine story, which we intend to initially fund from our available cash and revolving credit facility.
Speaker Change: Based on year to date results. We now are forecasting full year free cash flow of $55 million to $65 million given strong working capital management in the third quarter total capex and pre publication spending for the four years, it's still forecast to be $100 million to $110 million turning to.
Speaker Change: The financial details of our investment in nine story.
Speaker Change: Upon closing the transaction nine story will contribute significantly to scholastics financial results and be fully consolidated what scholastic entertainment and a new reporting segment.
Speaker Change: Nine story recorded revenue of approximately 104 million U S dollars and its most recent fiscal year ended August 31 2023.
Nine story is comprised of four business units that provide capabilities across the entire IP lifecycle with majority of its revenue currently coming from production work both the creative service production work. It does for other IP owners, including Scholastic and productions for IP that it controls.
Haji Glover: With that, I will now walk through our consolidated financial results. I will refer to our adjusted results for the third quarter, excluding one-time items, unless otherwise indicated. In fiscal 2023, the company did not report one-time items.
Speaker Change: On the basis of its compelling stand alone business model, we expect nine story to contribute top and bottom line growth through its existing content library best in class production studios and global distribution and licensing capabilities.
Haji Glover: Please refer to our press release tables and SEC filings for a complete disclosure of one-time items. As Peter described, in our seasonally smaller third quarter, revenues were $323.7 million, just slightly below the prior year period. Adjusted operating loss in the quarter grew to $30.6 million, as expected, reflecting increasing seasonality and spending in preparation for our anticipated significant Q4 compared to $27.7 million a year ago. Adjusted EBITDA was a loss of $7.2 million from $5.4 million a year ago, in line with adjusted operating income. Adjusted net loss, excluding one-time items, was $23.3 million, compared to $19.2 million in the prior year period.
Speaker Change: Adding in the synergy potential with scholastics own IP development work, we expect the deal to reduce the capital intensity of scholastics own productions, allowing us to expand development of scholastic IP and to drive long term earnings accretion as Peter noted earlier, we acquired 100% economic <unk>.
Speaker Change: <unk> minority voting rights and nine story for approximately 186 million U S. Dollars. This is a common deal structure and the Canadian media industry to ensure that nine story remains Canadian controlled and as such remains eligible for production tax credits there subject to approval by the Minister.
Speaker Change: Of Canadian Heritage, which is a condition of closing the transaction.
Speaker Change: Typical of these deals voting control wise in different class of shares the majority of which will be held by the current Canadian management of nine story.
Speaker Change: Scholastic will have rights to approve certain key decisions related to the company's business affairs, and overall strategy, including changing the nature of the Companys business, the setting of annual budgets and major investment in transactions.
Haji Glover: Adjusted loss per diluted share was $0.80 compared to $0.57 in fiscal 2023. Turning to our segment results, in children's book publishing and distribution, revenues for the third quarter decreased 5% to $193.6 million, primarily driven by strategic resizing of book clubs. Adjusted segment operating income was $2.7 million, up from $1.9 million in the prior year period, reflecting improved efficiencies on modestly lower revenues. Within the segment, consolidated trade revenues were $77.6 million in the quarter compared to the prior period revenues of $72.8 million, driven by strong front list sales and multiple best sellers in the quarter. This was partially offset by lower timing-related revenues in Scholastic Entertainment relative to the prior year when the company completed the delivery of episodes of the animated series Eva the Owlet, based on Scholastic's Owl Diary series. Book fare revenues decreased 1% to $102.7 million in the quarter, driven by slightly lower average revenue per fare, partly offset by higher average revenue per fare. Faircount remains on track to reach nearly 90% of pre-pandemic levels this year, up from 85% in fiscal 2023. Book Club revenues of $13.3 million were down versus prior year period revenues of $27.7 million.
Speaker Change: <unk> story also has access to tax credits in Ireland for productions that are based there as Peter mentioned nine stories access to tax subsidies as a key advantage, enabling the company to achieve significantly higher margins on production, which otherwise scholastic could not achieve in addition to fail.
Speaker Change: <unk> margins nine stories ability to presell productions through their global sales and distribution team also Derisk project financing, which should enable scholastic to pursue more production of its IP.
Speaker Change: I would also like to reemphasize how this investment in addition to our actions to return capital to shareholders aligns with our capital allocation strategy.
Speaker Change: Which prioritize growth investments as I outlined earlier, we expect to initially fund the investment from our available cash and revolving credit facility. We are also maintaining our current dividend and have re upped our share repurchase program as I just described.
Speaker Change: This deal is expected to close in scholastic fiscal 2025 first quarter, which begins June one 2024.
Speaker Change: Turning to our outlook as Peter noted we are affirming our previously revised guidance for the fiscal year as we head into our fourth quarter, which is typically our most profitable we continue to target adjusted EBITDA of $165 million to $175 million.
Speaker Change: This excludes the impact of one time charges of $10 $6 million related to restructuring and acquisition activity incurred so far this year. We continue to expect full year revenue to be approximately level with or slightly below the prior year.
Speaker Change: Thank you for your time today, and I will now hand, the call back to Peter for his final remarks.
Peter: Thank you <unk>.
Peter: As you've heard on the call today, there's an enormous amount of activity underway across the business.
Peter: We're driving momentum behind the trusted scholastic brand and our children's publishing and media franchises, helping to reach more kids and families with high quality engaging content that inspires learning on the page and screen and driving long term growth and shareholder value creation.
Haji Glover: As the company has previously discussed, we eliminated unprofitable offerings during the back-to-school season as part of our strategy to shrink this business to a more profitable core. These actions impacted third-quarter revenues as expected and will continue to have an impact for the remainder of the school year. Turning to the education solution segment, revenues were down 2% to $68.5 million in the third quarter, reflecting lower sales of supplemental instructional materials partially offset by higher state-sponsored program revenue. Segment operating loss was $800,000 compared to profit of $700,000 in the prior period, largely reflecting lower revenues and continued investments to realign key product lines to deliver blended, literacy-focused solutions. International segment revenues increased 16% to $59.1 million in the quarter, reflecting continued recovery in our major markets, particularly in Canada, the UK, as well as in Asia. The net foreign exchange impact was noticeable in the quarter.
Peter: Excited about the potential of our strategy and the strength of execution underway across the businesses to reach Argo for long term growth.
Peter: Let me now turn the call over to Jack.
Jack: Thank you Peter we appreciate our investors' time today and continuing support.
Jack: That we will open the call for questions.
Jack: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Jack: One moment for questions.
Brendan Michael McCarthy: Our first question comes from the line of Brendan Mccarthy with Sidoti You May proceed.
Brendan Michael McCarthy: Hey, good afternoon, everybody. Thanks for taking my questions.
Brendan Michael McCarthy: Just wanted to start off in the consolidated trade area. It looks like sales were up 7% solid growth there.
Brendan Michael McCarthy: Can you.
Brendan Michael McCarthy: Talk about the Frontlist and backlist, which contributed more to that growth.
We'd we were particularly it's Peter Yeah, we were particularly pleased with the.
Brendan Michael McCarthy: With a performance over the holiday season.
Brendan Michael McCarthy: And on top of that we did particularly well with a number of frontlist titles, particularly new graphics novels.
Brendan Michael McCarthy: Which is a category that we.
Brendan Michael McCarthy: We are very much the market leader say with I mean, he was really a question of the titles and authors, which we have published on a regular basis over a number of years, but also settled some good new titles as well. So it was really a combination of.
Brendan Michael McCarthy: Both new and continuity in that respect.
Speaker Change: Understood got it and then.
Speaker Change: Looking quickly at gross margins they were up nicely year over year.
How do you expect that trend.
Speaker Change: Trends to continue looking out the next couple of fiscal quarters, Hey, Brendan This is <unk>. Thanks for the question so.
Haji Glover: Segment operating loss improved to 5.9 million compared to a loss of 9 million a year ago, primarily driven by improved results in Canada, which benefited from the reorganization of book clubs in the first quarter. Adjusted unallocated overhead costs of $26.6 million increased from $21.3 million in the prior period, primarily reflecting favorable litigation settlements in the prior year. This was partially offset by higher rental revenue recorded in corporate overhead in the current period. As a reminder, this was previously recorded as a benefit in SG&A in the prior year period. On approximately 27,000 square feet of lease as of today, we expect annualized straight line rental revenue to total approximately 9.9 million in the fiscal 2024. Now I'm turning to cash flow and the balance sheet. Net cash provided by operating activities was $13.1 million in the current quarter compared to $7.6 million in the prior period. Lower inventory spend in the quarter, driven by lower freight and manufacturing costs compared to a year ago, improved working capital.
Speaker Change: So as we're looking right now with the cost of freight.
Brendan Michael McCarthy: And our Cogs line, you can see that we have a strong improvement year to date.
Speaker Change: About $20 million year.
Speaker Change: Year to date, we have saved in both Cogs and our inventory is really drove it around our utilization are.
Speaker Change: We're basically back in line to pre pandemic levels. When it comes to our inventory levels, which is really driving the profitability and our gross margin section.
Speaker Change: Got it thanks that's helpful.
Turning to the book clubs business.
Speaker Change: Pretty pretty large revenue decline there but.
Can you offer some insight into the timing of the shrink to grow strategy there.
Maybe over the next couple of quarters when do you when do you expect.
Speaker Change: Yes, the revenue variation to kind of normalize.
Speaker Change: Well, it's it's a it's.
Speaker Change: It's a medium to longer term project.
Speaker Change: Brendan in terms of what we're doing.
Speaker Change: What we what we're seeking to do is to have a smaller but more profitable business and I would expect that.
Speaker Change: It's going to take some quarters before we.
Speaker Change: Before we get to the destination that we might ultimately want to be too, but I'm reasonably confident that there is going to be in.
<unk>.
Speaker Change: On a quarter.
Speaker Change: Quarter over quarter in terms of performance and what we're doing at the moment is.
Speaker Change: He is very much working right now on testing some new strategies for next year that we hope will.
Speaker Change: Contribute very much to our medium to long term plan.
Speaker Change: Got it got it thanks, Peter maybe one more question for me just to get a nine story investment Guide I know you mentioned, probably lower capital intensity business Theyre looking out in the future as well as certain tax advantages.
Haji Glover: We continue to manage inventory purchases substantially closer to our demand, resulting in sufficient inventory on hand and lower spend. Free cash flow use in the third quarter was $7.1 million compared to $11.9 million in the prior year period, reflecting lower working capital partially offset by one-time severance costs. At the end of the quarter, cash and cash equivalents, net of total debt, were $78.9 million compared to $218.5 million at the end of the fiscal year 2023. In addition to investments in content and capabilities to drive growth, we continue to return capital to shareholders in the third quarter through our regular dividend and open market share repurchases. We repurchased 1.4 million shares in the third quarter for $54.2 million. Together with our regular dividend, we've returned over $60 million in the third quarter and $161 million so far this fiscal year. In fiscal 2024, thus far, we have repurchased 3.6 million shares, which net of 523,000 shares issued related to stock compensation represents 11% of the company's shares outstanding. The company's shares outstanding are now below $28 million.
Speaker Change: But do you expect to see any integration costs or elevated costs.
Speaker Change: This investment over the next couple of quarters.
Peter: We don't expect to see a large number of integration costs. If anything we're looking to continue to let nine stories workers are fine.
<unk> opportunities to bolt on things within that business.
Peter: Right now, it's very efficient and we should continue to see that there was a potential opportunity for some synergies in the future.
Understood.
Speaker Change: Peter Thank you very much for the answers I appreciate it that's all for me. Thank you Brendan.
Speaker Change: Thank you and this concludes our Q&A I will pass the call back to management for any closing remarks, well. Thank you operator, and thank you to all of those who who joined US This afternoon.
I wish you all a happy spring and we look forward to engaging with our investors in the coming days and to providing a further update on our progress, including our investments in nine story and on our plan for fiscal 2025 in July.
Speaker Change: On our year end call. Thanks again goodbye.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
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Haji Glover: We do not anticipate our share repurchase program or regular dividend to be impacted by the investment in 9th Story, which we intend to initially fund from our available cash and revolving credit facility. Based on year-to-date results, we are now forecasting full-year free cash flow of $55 to $65 million. Given strong working capital management in the third quarter, total CapEx and pre-publication spending for the full year is still forecast to be $100 million.
Speaker Change: Okay.
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Speaker Change: Yeah.
Speaker Change: So.
Speaker Change: Jim.
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Haji Glover: The company's shares outstanding are now over $100 million. Turning to the financial details of our investment in Nine Stories, upon closing the transaction, Nine Stories will contribute significantly to Scholastic's financial results and be fully consolidated with Scholastic Entertainment in a new reporting segment. Nine Stories recorded revenue of approximately 104 million US dollars in its most recent fiscal year ended August 31st, 2023.
Speaker Change: Yeah.
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Okay.
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Haji Glover: Nine Story is comprised of four business units that provide capabilities across the entire IP lifecycle, with the majority of its revenue currently coming from its production work, both the creative service production work it does for other IP owners, including Scholastic, and productions for IP that it controls. On the basis of its compelling standalone business model, we expect Ninestory to contribute top and bottom line growth through its existing content library, best-in-class production studios, and global distribution and licensing capabilities. Adding in the synergy potential with Scholastic's own IP and development work, we expect the deal to reduce the capital intensity of Scholastic's own production, allowing us to expand the development of Scholastic IP and drive long-term earnings accretion. As Peter noted earlier, we acquired a 100% economic interest with minority voting rights in Ninth Story for approximately $186 million. This is a common deal structure in the Canadian media industry to ensure that Ninth Story remains Canadian-controlled and, as such, remains eligible for production tax credits there. This transaction is subject to approval by the Minister of Canadian Heritage, which is a condition of closing the transaction.
Speaker Change: Okay.
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Speaker Change: Yes.
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Haji Glover: Typical of these deals, voting control lies in different classes of shares, the majority of which will be held by the current Canadian management of Nine Stories. Scholastic will have the right to approve certain key decisions related to the company's business, affairs, and overall strategy, including changing the nature of the company's business, the setting of annual budgets, and major investments in transactions. Nine Story also has access to tax credits in Ireland for productions that are based there.
Speaker Change: Yes.
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Haji Glover: As Peter mentioned, Nine Story's access to tax subsidies is a key advantage enabling the company to achieve significantly higher margins on production, which otherwise Scholastic could not achieve. In addition to favorable margins, Nine Story's ability to pre-sell productions through their global sales and distribution team also de-risks project financing, which should enable Scholastic to pursue more production of its IP. I'd also like to re-emphasize how this investment, in addition to our actions to return capital to shareholders, aligns with our capital allocation strategy, which prioritizes growth investments, as I outlined earlier. We expect to initially fund the investment from our available cash and revolving credit facility.
Speaker Change: Okay.
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Speaker Change: Okay.
Yes.
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Haji Glover: We are also maintaining our current dividend and have re-upped our share repurchase program, as I just described. This deal is expected to close in Scholastic's fiscal 2025 first quarter, which begins June 1, 2024. Turning to our outlook, as Peter noted, we are affirming our previously revised guidance for the fiscal year. As we head into our fourth quarter, which is typically our most profitable, we continue to target adjusted EBITDA of $165 to $175 million. This excludes the impact of one-time charges of $10.6 million related to restructuring and acquisition activity incurred so far this year.
Speaker Change: Yeah.
Speaker Change: Yeah.
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Yeah.
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Peter Warwick: We continue to expect full-year revenue to be approximately level with or slightly below the prior year. Thank you for your time today, and I will now hand the call back to Peter for his final remarks. Thank you, Haji. As you've heard on the call today, there's an enormous amount of activity underway across the business. We're driving momentum behind the trusted Scholastic brand and our children's publishing and media franchises, helping to reach more kids and families with high quality, engaging content that inspires learning on the page and screen and driving long-term growth and shareholder value creation.
Speaker Change: Yeah.
Speaker Change: Yes.
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Peter Warwick: I'm excited about the potential of our strategy and the strength of execution underway across the businesses to reach our goal for long-term growth. Let me now turn the call over to Peter. Thank you, Peter. We appreciate our investors' time today and continuing support. With that, we will open the call to questions. Thank you. As a reminder, to ask a question, please press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from the line of Brendan McCarthy with Sidoti. Hey, good afternoon, everybody.
Speaker Change: Yeah.
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Operator: Thanks for taking my question. I just wanted to start off in the consolidated trade area. Looks like sales were up 7%, solid growth there, can you tell us a little bit about the program? You talked about the front list and back list and which contributed more to that growth? Peter Warwick, Haji Glover, Scholastic Corp., Please. Foreman's gone, and on top of that, we as well, and so it was really a question of the title and regular base.
Speaker Change: Jim.
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Speaker Change: Okay.
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Peter Warwick: Peter Warwick, Haji Glover, Scholastic Corp, and many more, both new and old. Understandable. Got it. And then looking quickly at gross margins, they were up nicely year over year. How do you expect that trend to continue looking out the next couple fiscal quarters? Hey Brendan, this is Haji.
Haji Glover: Thanks for the question. So as we're looking right now at the cost of freight in our COGS line, you can see that we have made strong improvement year to date, roughly about 20 million dollars that we have saved in both our COGS and our inventory. It's really driven around our utilization, basically back in line to pre-pandemic levels when it comes to our inventory levels, and that really drives the profitability in our growth market.
Peter Warwick: Got it. Thanks. I turned it to the book club's business. Another pretty large revenue decline there, but can you offer some insight into the timing of the shrink to grow strategy there, you know, maybe over the next couple quarters when do you expect the revenue variation to kind of normalize? Well, it's a medium to longer term.
Speaker Change: Okay.
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Peter Warwick: What we're seeking to do is to have a, I would expect, and the, I'm reading, and many more. We hope, Got it, got it. Thanks, Peter. Maybe one more question for me, just looking at the nine-story investment. I know you mentioned probably lower capital intensity businesses they're looking out for, and other people. But do you expect to see any integration costs or elevated costs from this investment over the next couple of quarters? We don't expect to see a large number of integration costs.
Speaker Change: Okay.
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Peter Warwick: If anything, we're looking to continue to let Nine Stories work as they are and find opportunities to bolt onto within that business, but right now, it's very efficient, and we can continue to see that there are potential opportunities. Understandable. Haji and Peter, thank you very much for the answers. I appreciate it. That's all from me. Thank you, and this concludes our Q&A. I will pass the call back to management for any closing remarks. Thank you, Operator, and thank you to all of those who joined us. I wish you all a happy spring. We look forward to engaging with our own, providing, and other private parties.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Yes.
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Operator: Thank you. Thank you. Thank you. Thank you.
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