Q1 2020 Earnings Call
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I would now like to hand, the conference over to your speaker today.
Senior Vice President Treasurer, and head of Investor Relations Gil Dickoff surge. Please go ahead. Thank you Letif and good afternoon, everyone. Welcome to Scholastic <unk> first quarter 2020 earnings call with me here today are <expletive> Robinson, our chairman, President and Chief Executive Officer, and Ken clearly the company's Chief Financial Officer.
We've posted an investor presentation on our Investor Relations website at Investor Dot Scholastic Dotcom, which we encourage you to download if you have not already done so.
I would like to point out that certain statements made today will be forward looking is toward looking statements by their nature are uncertain and may differ materially from actual results.
In addition, we will be discussing some non-GAAP financial measures as defined in regulation G. reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release filed this afternoon on a form 8-K, which has also been posted to our Investor Relations website.
We encourage you to review the disclaimers in our press release and Investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the FCC and now I would like to turn the call over to <expletive> Robinson.
Good afternoon, everyone and thank you for joining the call today as millions of U.S. students and teachers settle into their their classrooms. This new school year. The 99 back to school season for scholastic the vast majority will come in contact with and find support from.
Scholastic, whether it be through our clubs fairs, the classroom library, we filled teachers build instructional materials or classroom magazine, we were driving force in creating a positive environment for literacy.
As we near or hundredth anniversary and celebrate his unparalleled reach and impact.
We are working on how to expand this important connections to schools and families to the next 100 years. This vision motivates our technology enhancements to better find answers consumers our expansion into new education markets and leveraging our strengths as publishing innovators as well as critical distribution channels for kids to find engaging fiction and non fiction.
We're moving forward with a rigorous process to improve operating income as we detailed in our July call, which started to take effect in our first quarter to that end, we typically record a loss in the first quarter as U.S. schools or a break over the summer as you know.
First quarter revenue was 232.6 million, an increase of 7% compared to 218.4 million in the first quarter of 2019 adjusted EBITDA in the first quarter was 61 million compared to 64.5 million one year ago, both meeting our expectations.
As such we are affirming our outlook for revenues for the 2020 fiscal year in the range of 167.67 billion to 1.70 billion and in a few minutes can clearly, we'll do you feel or quarterly operating results Vps and adjusted EBITDA.
First I would like to share highlights and updates with you.
Our distribution channels in clubs and fairs remain important access points for kids to find books at affordable prices books, they want to read because they had ever label characters and story lines information that resonates clubs and fairs are also significant support for teachers and building classroom libraries, and filling supply needs through incentive programs.
This year, we will deliver approximately 120000 book fairs, and 60000 plus schools supported by more than 3000 employees in our book Fair Group from field Representatives to operations and served.
Like 58 regional distribution centers more the experience of the scholastic book fear is culturally relevant as ever as proven by hundreds of thousands of social media posts touting the unique passion you Vince.
Evoke even in the face of increase National competition, we have enhanced our leading reputation in market share while keeping the focus on margin improvement or ongoing efforts include fear segmentation and targeting improve Pos devices and automation of operational processes to schedule fearsome assigned product.
In the coming months, we're looking forward to hosting fears with new and returning customers and to seeing continued adoption of our E. Wallet feature in core encouraging more fear true true persons to reach out to family members and the community to digitally pre author.
We authorize purchases for children to independently select their own books.
As mentioned in previous calls the new sales tax collection program instituted in response to the Supreme Court's Wayfair decision represented a significant for for change for clubs last spring.
We will have more data on or how or more than 750000 teacher customers are adjusting to this change in future calls. This year. This past quarter was focused on back to school enhancements and engagement of our teachers sponsors. We anticipate improved sales tax collection as well as online experience improvements to encourage parents and teachers to fulfill orders digitally using the processes and reducing marketing expense will still be able to benefit from the core Flyers that drive club participation additional improve margin efforts include deployment of real time management dashboard for better analytics selective price increases rationalize promotion offerings and improve customer service.
In fiscal 2019, we saw a sharp growth in our trade business and momentum continues this year. We're delighted that just last week, we had seven out of the top 10, New York Times Children's series Best Sellers Dog man for whom the Bill the ball Rolls released at number one in August remains the top book across all categories and as noted by Publishers Weekly had the best first week sales of any dog man booked to date all good news they pill keys influence within within the industry continues to grow as evidenced by a dog man and captain Underpants sharing the number one and twos Watson bestseller lists weld Daves do good tour fill stadiums. During these events he championed smith messages of kindness, which resonate with kids as well as their parents, who we know are increasingly focused on character building when seeking out books for their children.
The power of graphic novels is a landmark examples scholastic is unmatched ability to understand what kids want to read filling an unmet need by pipe pioneering the Sean were for kids or branches that Acorn line Super early readers are further example, we're filling fast growing niches within the market.
Observing that kids, who are graduating from early readers to chapter books.
The desire a bridge for that experience or editors created these formats to meet kids, where they are in better encourage lifelong readers.
Newly acquired make believe ideas interactive and innovative novelty books are yet another market leader, we are proud to share with young families never touch a porcupine has been number one the mass market Sam's club.
And we will expand the best selling series to 10 Board books in this fiscal year with the release of new titles.
As always we have highly anticipated titles, debuting including this week Reno take little tug lawyers guts, continuing to leverage our strengths and graphics and bringing really double struggles such as things like city through strong characters to our readers.
Just this week she filled the Barnes and noble in New York City with young fans eager to talk with her about her book characters and her life. She was in the building your scholastic today talking to the staff and as usual conveyed per unique approach to writing and linking her books to real life Kid real lives of kids, Harry Potter and the government fire. The illustrated edition will release on October eight.
Followed by the November release of Harry Potter and the cursed child, the journey behind the scenes of the award winning stage production and the global release of the Dinky Donkey sequel to viral sensation. The walkie talkie will be available November 1st.
As these live action Clifford the Big Red Dog movie moves to post production, we eagerly await the December debut of the New animated series. We also anticipate increased Bose and publishing around our beloved character in international markets. We continue to see growth in trade publishing, although we have a strong us dollar negatively affects or revenues. In addition, we are building upon global resources and print and digital content and strong brand recognition to support strong revenue and profit goals in our business. We continue to receive positive responses to our digital English language learning programs targeted to meet the needs of a growing middle class consumers.
In education.
Well, we're into some new areas, we're emphasizing a comprehensive approach to literacy working with school districts and community based organizations.
To build programs for 365 day learning, we support literacy instruction in schools through a coordinated effort included including personalized learning for students and professional development for teachers with supplementary product such as guided reading or new core curriculum scholastic literacy and digital subscriptions with engaging content designed to create excitement all the while providing critical foundational skill development in photonics and vocabulary.
Scholastic literacy sales have begun but are not a driver in this year's first quarter as the product is just coming off premise and being delivered early adopting schools, and Alabama, Indiana, Indiana, and Ohio or supplemental products remained strong and innovation continues to come from the groups such as this coming quarters rising voices, a new classroom collection designed to resonate.
With voice of color.
Scholastic digital subscriptions I'm searches scholastic first then word the key components of scholastic literacy as well the standalone offerings are gaining momentum as district administrators school principals curriculum specs specialists and teachers see how the needs of their students are directly met by these programs. The larger sale of scholastic literacy pro today close this summer with Cypress Fairbanks Texans purchasing eight years upfront.
As of this back to school season educators are welcoming increase the ease of access to scholastic digital education products available through single sign on integration with Google classroom as well of certified standards based LTL integration with their own learning management systems finally across our businesses. We are seeing the benefits of our technology and efficiency improvement since.
Guided by our Scholastic 2020 planned incremental savings are primarily driven through procurement print optimization warehousing efficiencies through process changes rationalizing shipping costs and increasing routing efficiencies. This fall or educational sales team is using a dynamic automated dashboard views salesforce dot com.
To manage performance and pipeline. They now have better type top line visibility into scholastic is current relationship within each district and school account across scholastic channels with that background I will turn the call over to Ken Cleary Chief Financial Officer.
Thank you <expletive> and good afternoon today, I will refer to our adjusted results for the first quarter, excluding onetime items unless otherwise indicated.
We adopted the new revenue recognition standards pursuant tacey six or six in the first quarter in the last fiscal year. So we will no longer breakout the impact of the new standard on results for comparison purposes.
In the current quarter, we adopted the new assay, a 42 lease accounting standard this adoption required us to record substantially all of our leases on the balance sheet, but no impact on the Companys results of operations.
As <expletive> mentioned revenues were $232.6 million versus $218.4 million in the first quarter last year, an increase of 7%. The big story in the quarter was our strong trade front list worldwide with our U.S. trade operations of 21% year over year.
Most impressive was our strength in series publishing Dog Man Captain Underpants, Harry Potter, the bad guys and wings of fire, where each new release had a positive pull on the euro earlier titles in our backlist.
Our operating loss was $83.1 million versus $83.3 million last year with contribution from higher sales along with better cost management in children's book publishing and distribution and education in the quarter.
Adjusted EBITDA showed a loss of $61 million compared to a loss of $64.5 million in the first quarter 2019 and improvement of 5%.
We believe that adjusted EBITDA is the most meaningful measure of operating profitability and useful for measuring returns on capital investment over time since it's not distorted by unusual gains losses or other items such as share repurchases.
The better off results in children's books, and education were partially offset by higher depreciation expense and higher technology spend and corporate overhead both as expected.
As well as slightly higher operating expenses and some of our international businesses.
I should remind you that scholastic typically records a loss and its first quarter. When most of your schools are closed for summer break our school channels do not have significant revenues.
We had $4.3 million of one time items in the current period all in overhead.
2.8 million in pre tax severance associated with glass between 20 repositioning programs and 1.5 million for an amicable no fault settlement a legacy claim for an alleged patent infringement.
There was $500000 in one time items in the prior period.
Now turning to our operating segments.
Children's book publishing and distribution first quarter revenues rose, 15% to $109.6 million from $95.7 million last year. The main driver as we've already discussed was a strong trade frontlist led by two new summer releases in our best selling dog man and wings of fire series.
This was augmented by the incremental revenue from our make believe ideas business in UK, where we now consolidate revenues after having completed our purchase of a majority interest in the company this past spring.
Prior to this our minority position M.B. I was held as an equity investment and sales were not consolidated in our operating results.
We also saw a positive contribution on the segment's top line from the timing of new Scholastic Entertainment programming sales as well as higher net redemptions of scholastic dollars in our school book Fairs channel. While we are optimistic that we are effectively dealing with the new sales tax requirements in book clubs and the impact from greater competition in the fair space is too early in the school year to make any meaningful comments on either front.
Segment operating loss improved by $4.3 million on the higher sales and trade and lower operating costs in clubs and fairs.
Education segment revenues increased 1% to $48.4 million with initial sales of recent release Scholastic literacy our Nucor literacy instruction program, along with higher sales of our professional learning products and teaching resources.
These revenue gains were partially offset by declines in summer reading and classroom collections in the quarter.
Higher classroom magazine and digital subscription billings in the quarter will be recognized in future periods upon delivery magazines over the course of the fiscal year and certain digital subscriptions extending out multiple years.
The segment operating loss improved by $1.5 million or 10% on better cost management.
International segment's first quarter revenue of $74.6 million was on par with the prior year. However, revenues were up 3% year over year on a constant currency basis, we realized higher trade sales in all of our major markets best selling books by leading authors day Pelkey Arab lobby.
Liz Pierce shown on Doe, and Julia Donaldson, and Axel Schaeffler as well as higher education sales in Asia, Although our direct to home sales in some Asian markets and our export business fell slightly.
First quarter corporate overhead expense was $24.3 million versus $20.4 million in the first quarter 2019.
The higher overhead excluding onetime items in the current period is mainly due to the timing of spend related to our ongoing rollout of new technology data analytics platforms as well as higher depreciation expense for recent new system implementations placed into service.
We expect cash to begin to build again in the later part of the second quarter as is typical for this time of year.
Net cash used in operating activities was $97.6 million in the current fiscal quarter compared to use of $89 million last year and free cash use was $118.5 million in the first quarter of fiscal 2021st as a free cash use of $125.9 million, a year ago and improvement of 6% and in line with our internal expectations at quarter end, we had 109 $9.4 million in cash and cash equivalents compared to $269.8 million a year ago.
In the first quarter, we had 13.5 million of planned capital expenditures and 7.4 million in prepublication and production spend.
As well as $12.6 million in open market repurchases and 5.3 million in dividends both report below the free cash line.
I will note that our combined new capital in prepublication spend $60 million or 43% below this time last year.
We are affirming our fiscal 2020 outlook for revenues in the range of $1.67 billion to $1.7 billion and adjusted EBITDA of $140 million to $160 million and we have more closely tied senior management incentive compensation to the achievement of these adjusted EBITDA targets.
Our investments in new technology and data analytics, the key component of our capital spending plans. This year remain on track with overall capital expenditures projected in the $75 million to $85 million range.
To achieve these year over year target gains were focused on controlling costs and improving efficiencies throughout our operations significant process changes are underway supported by analytics, new systems and tools are all three altering the way we buy inventory.
Influencing business, you know decisions through improved clarity around operational costs, and helping us better assess the cost benefit trade off across modes of distribution.
In particular in fares were reducing inventory purchasing.
Through more efficient buying and printing strategies freeing up working in human capital encouraging the use of existing excess inventory with better margins and award in future inventory waste as well as using our affairs customer incentive programs in a more targeted way.
Our new Oracle direct procurement system is slated to go live in Q2.
Enabling a series of process changes that will help with upstream product demand and supply planning for improve return on inventory purchasing spend.
We are also deploying a new workforce management solution or Jefferson City, Missouri National distribution operations to drive warehouse labor savings.
Through more dynamic and mobile enabled scheduling and managerial oversight.
With that I will hand, the call back to Gil for the Q and a session.
Thanks, very much Ken on the teeth, we are now ready to open the lines for questions.
As a reminder to ask a question you need to press star wanting your telephone to withdraw your question press the pound key please stand by while we compile the culinary roster.
I have a question from drew Crum of Stifel. Your line is open.
Okay. Thanks, Hey, guys good afternoon.
Couple or maybe starting to dog man you talked about the week one sell through can you address the.
Initial print run how that compared to the last spoke I believe it was 5 million copies.
Okay similar print run.
Okay, we're not announcing that the numbers but were.
And we're keeping a focus on management of inventory, but our confidence and dog man grows and as you may have noticed.
The new book sold better than the.
Last year's release, so so it's definitely on the upswing and.
Judging from kids comments on the incredible amount of of publicity coming in here and enthusiasm for kids and kids stopping people in the street and asking you know when is the next augment coming it's it's really those.
Really still accelerating and its impact.
Okay got it and then I know in a couple of occasions. You suggested it was a little bit early in the fiscal year to kind of gauge the efforts, you're making around addressing competition in fares and.
Sales tax collections with clubs, but what does your guidance imply or is that in terms of improving margins for those two businesses I know, it's a target the goal obviously, but what does your guidance.
Well certainly certainly we are where we see good progress in cost management in the first quarter, even though that's it.
It's not an operational quarter. It was a quarter, where we're doing an awful lot of stuff preparing for the year and we were holding our costs very well fears.
Everywhere else in the company in that quarter.
We have very targeted programs.
In respect to.
Bringing down the cost of our operations in fares.
We have an ongoing group that works every single day to focus on a number of different projects in that in that area at the same time, we're very focused on.
Hope is being strong competitors and providing the very best possible their experience, including the inventory availability and.
Uh huh.
Well managed fares and we are.
We believe that we're well positioned to do that well managing their cost down and fears.
Okay on sales tax it's too soon to say.
But our guidance certainly.
Implies that we.
We don't see any major problems, but it's too early to say so because it's so early in the quarter and we're just beginning to get sales from.
Teachers were clicking no kids as kids come back to school.
Okay.
And then the overhead costs were up year on year, you gave an explanation as to why that makes sense I'm just curious as to whether or not this is indicative of the type of increase we should expect to see through the balance of the fiscal year.
So so yeah, you're you're going to remember a big piece of this is depreciation expense are you that you will see the depreciation expense continuing to come through and our our spending in terms of technology spend Noncapitalized technology spend this year will most certainly continue.
A similar rate.
We will go down in years beyond that though.
Okay.
And then I think going into the fiscal year you guys are pretty bullish on Asia I know, it's just one quarter, but can you address the lower direct to home sales in the quarter along with the export business.
I expect that to snap back in the out quarters.
Yeah, I think the the Asia's direct to the home sales are over there that we carry these out and and primarily developing countries, including Malaysia, and Thailand, Philippines, Indonesia, or the principal markets for that business and there's always something going on those markets.
This year was in the first quarter it was.
In Malaysia, where there was some.
So changes in the pattern of going into the malls I will not for you with the long.
Description, but it's a timing matter in.
We believe that business will come back later.
So an export but with the strong us dollar.
Export is facing headwinds because their pricing is.
Is in US dollars, so that does affect the business, but we seem to have.
No were seemed to have some momentum in that business and it seems that we're on track for budget overall for the year.
Despite that performance in the quarter.
Okay. Just one more from me can you quantify the impact from the new programming sale in the quarter and.
How should we think about the cadence of these contributions for the balance there and I guess.
A separate item.
You know you're consolidating the make believe business now was that meaningful to.
Sales in the fiscal first quarter.
So let me let me take the latter one first in terms of M.B.I. yeah. Their sales in there and it's a it's a part of the the pickup that we have in trade, but it it's a single digits in terms of revenue for the quarter.
Remember M.B. I product is sold throughout all of our international operations as well as our U.S. channels are you a school channels. So.
It's you're not going to see it all in one spot it really it really is an integrated type of operation.
And in terms of the.
Sci our programming revenue remember, we had the big pick up last year, but that wasn't really back with sales. So when you talk about contribution going forward. The biggest contribution yeah. There's some there's some topline revenue in their single single digits, but.
Were you are not looking at a major contribution because of your programming costs or we have costs associated with that as well, whereas when you. When we saw the backlist everything was already off the books so.
So you're not looking at a major contribution there, but you're looking at a an opportunity to sell products through as well pull through product. So.
It's good to get the brand out there, obviously and that's what we're doing.
Okay, and just to clarify kind of go back to the MPCI business, you're capturing are recording revenue in both trade and international.
Yeah, you'll see they have a.
Yes, So you know kind of trade international and what I'm, saying is they sell product into our other subsidiaries and our other subsidiaries onward sell the product so.
MB I as a standalone entity has had sales and they are wrong, but we're deploying the other channels as well to we're leveraging the other channels as well to sell that product.
Okay got it okay. Thanks, guys.
Thank you Andrew.
Thank you at this time I'd like to turn the call over to Richard Robinson, Chairman, President and Chief Executive Officer for closing remarks.
Yes, Sir thank you.
All for listening to our first quarter report.
We're happy to be moving forward in the new school year.
And we will look forward to talking to you in December where we will be giving more information on our club and fair activity of course, Thank you very much for your support.
And thank you for listening today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.